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The Indian automotive industry: Caught in the perfect storm

June 2019 will mark the twelfth consecutive month when passenger vehicle sales have declined year-on-year

By Deepesh Rathore

  • Published 17.07.19, 8:49 AM
  • Updated 7.11.19, 12:50 PM
There is no single reason for this carnage and it seems to be an abnormal coming together of multiple - normally minor - factors.
There is no single reason for this carnage and it seems to be an abnormal coming together of multiple - normally minor - factors. (Shutterstock)

For a spoilt-by-growth industry that last saw a dip, albeit a very slight one, in 2013, the last 12 months have turned out to be a nightmare, and with no end in sight.

Like usual, whenever we see a deviation from the normal in any industry, we tend to find major issues. For the automotive industry, it is often things like a slowing economy, high interest rates, high fuel costs or a sudden increase in prices that result in a slowdown.

Reasons for the decline

Except, this time, it is difficult to put your finger on the key reasons why sales are declining. There is no single reason for this carnage and it seems to be an abnormal coming together of multiple - normally minor - factors.

The economy is still growing at around 7 per cent, give or take the calculation methodology. Unemployment is high but unorganised sector entrepreneurship seems to have more than made up for it if one goes by the MUDRA loan data.

Similarly, the interest rates are not high - though not low either - enough to be a spoilsport. Last I checked, major FIs were willing to disburse loans at 9 per cent interest. Then there are the fuel prices - at about Rs 75 to Rs 80 per litre, prices are elevated. But this government has cleverly made Indians get used to prices hovering at around Rs 75 per litre to the extent that they have stopped making a noise about fuel prices.

So, when the list of obvious reasons dry up, I start looking at the not-so-obvious ones and here are a couple of them. These are not short-term reasons, rather big trends that are not going away. Any future growth in the industry would have to come through overcoming these trends.

Parc

The vehicle parc is a measure of the total number of road-worthy vehicles. An estimate by Emerging Markets Automotive Advisors (EMMAAA) puts the current vehicle Parc for Compact cars and SUVs at more than 16 million units in 2019. That is 16 million high-quality affordable cars on the road, and I am not counting anything smaller than the Wagon R in this.

I would assume that a healthy share of these vehicles is being offered in the used car market, making the mainstream used car market more attractive than it ever was.

Adding to the rich availability of used cars is the ease and assurance of buying and selling that has improved over the last few years due to the entry of some well-funded start-ups like Cars24, Carsdekho and Droom.

These start-ups have eased the pain of buying and selling a used car. They have also set up some basic checks to provide confidence to the used car buyer. Even though their current reach is limited, they have already achieved a good penetration in the large metros and are driving used car transactions.

As a result, used cars are now a good viable alternative for a section of customers, especially for those with fast-moving, quick-transfer jobs.

Aggregators and urban clogging

The urban market accounts for an overwhelming share of new car purchases with a very moderate contribution from the rural market. Even within the urban market, the larger metros lift more than their share of new car purchases.

However, these centres have been increasingly been stressed to the point of getting clogged. Average commuting speeds have stayed stagnant and even gone down in many metros even with the addition of new roads and mass transit systems.

Every day, millions of man-hours of work and fuel worth billions are wasted through cars caught in traffic jams. A rider caught in traffic suffers a loss in productivity. Till now, the only way out was to hire a chauffeur and enjoy the comfort of the rear seat, using the time productively.

The other option is to use an app-based cab aggregator service like Ola or Uber. Since hiring a chauffeur often comes with its own set of complexities, office-goers in large metros are increasingly using these services as a mode of commuting regularly to the office. The cabs do not reduce urban clogging, they end up increasing it. But the riders are liberated with extra productive time they would otherwise lose. With an hour of commuting each side, this often translates into an extra day per week.

However, aggregators have been around for many years and car sales never blipped. So, what has changed this time?

I look at it as a maturing of the system. When aggregators first appeared on the scene a few years back, the cabs were being used for mostly non-office commutes. Over the years, the number of cabs in most metros has grown exponentially to the point that the aggregator services are dependable, their costs reasonable and fathomable.

As a result, new car buyers are delaying purchases while planning their daily commute around cab aggregator services.

Then why are sales to cab aggregators not bolstering passenger vehicle sales? Well, they did for many quarters but in most of the metros, the aggregator fleet sizes are reaching a saturation level. Add a significant number more and the per cab profitability would sharply dip, and that’s not good for business.

As a direct correlation, cab aggregators have the biggest fleets in cities where passenger car sales have been the highest. Once these cities started feeling the pains of clogging, riders should have shifted to cabs, and that is exactly what has happened. Except, the cab density has already reached a high level and so no further sales have resulted due to this move.

Also, the replacement demand from the aggregator cab market is still low as the first incentives-driven boom in cab addition happened only a few years back and these cars have not yet reached the end of their lifetimes. Replacement demand would surge only in about two years. In the meantime, it looks as auto sales will remain stuck in the slow lane.

The author is an auto industry analyst.

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