Considering that the automotive sector posted a compounded growth of 12-13% during the last five years, the industry was expected to post new records in FY09 too. However, all automotive segments including passenger vehicles, two wheelers and commercial vehicles posted flat to negative sales.
Though one of many reasons, one crucial factor for the downturn can be attributed to the sheer lack of availability of vehicle finance. Many banks and financial institutions had withdrawn themselves from the market completely, purely due to fear of loans getting irrecoverable. ICICI Bank, which was the largest financier of two-wheelers, voluntarily decided to close many of the markets mainly located in northern India. This was followed by some other finance players.
In addition, loan lending norms were made stricter to avoid any further rise in delinquencies. The loan to value ratio was reduced significantly by private players to 60% from 85% earlier discouraging buyers to make the purchase.
Also, a dramatic fall in capital markets, the terror attack in Mumbai (one of its biggest markets) and uncertainty about the future forced prospective buyers to do a re-think on their purchase.
As a result, buying sentiment took a dip leading to a near flat growth of the passenger vehicle market. This includes cars and utility vehicles which grew by just 0.28 per cent during this year so far. The commercial vehicle industry was the worst hit with a decline of 21%. Two-wheeler makers had to settle with a moderate growth of just 2.5%.
In order to tide over the downturn companies are looking at various ways of achieving optimal efficiency internally and externally. To counter the external environment, which was plagued with financial woes, companies have now started to forge tie-ups with public sector banks to.
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In addition, auto companies have also made their supply chains more efficient while also trimming their production, which will now suit to demand. This will avoid unnecessary pile up of inventory at the dealer's end.
Jnaneswar Sen, vice president (marketing), Honda Siel Cars India said, "We have decided to take stock of the situation on a month-on-month basis, this will help us in being more efficient."
Besides cutting production and man-hours at their plants, companies had started to make optimum use of their current resources relating to raw materials. This includes reduction in wastage and automation.
Auto companies are looking to save a substantial part of the funding by way to giving out auto components manufacturing contracts to relatively newer players. These players will be those who have not done too much business but are delivering required quality at competitive prices.
Besides, companies are also looking to increasingly make use of substitutes like plastics, which are lighter and cheaper than heavier and expensive metal equivalents.
Some auto companies like the two wheeler segment market leader Hero Honda and the car market leader Maruti Suzuki have made significant in-roads in the rural and semi-rural markets for the country.
The severity of the on-going economic downturn is broadly felt only in the urban market of the country whereas the rural areas remain largely unaffected.
Capitalising on the hugely untapped resource, most of the new dealerships opened by Hero Honda have come up in such rural markets. Buyers in such areas do not depend on finance for purchase due to availability of adequate cash.
Due to its lesser dependence on the urban centres, Hero Honda has so far managed to post a very respectable 12% growth in FY09 as compared with Bajaj Auto’s decline of 11%.
Ravi Sud, Chief Financial Officer, Hero Honda, said, "Due to a continued good growth seen in demand for our bikes in the rural areas we are confident of posting a 7%-9% growth in the next few quarters."
A significant erosion in margins in the last few quarters (Tata Motors posted a loss of Rs 263 crore for the third quarter, its biggest in seven years) had forced many of the auto makers to hike their prices in recent months. However, due to fierce competition among the two wheeler companies, prices of two wheelers have remained untouched.
In addition, softening of commodity prices since the last six months has also helped companies to improve margins up to a large extent.
The government had also provided assistance to the sector by slashing CENVAT rates by 4% which translated into an excise duty cut of about 3.5% in December 2008. This had brought down prices of all vehicles including cars, two-wheelers and commercial vehicles.
Other government initiatives like improving internal demand for buses through the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) programme also benefitted bus makers like Tata Motors and Ashok Leyland.