For the automobile sector, the tunnel is long and dark

An average of 30-60% of installed capacities producing passenger and commercial vehicles are at present lying idle in the country

The slowdown in demand has hit the automobile market hard. Consumers are deserting showrooms and deferring purchases due to the high inflation. Also, high fuel prices and interest rates are keeping them away, despite attractive discounts schemes announced by manufacturers. Most companies are running discounts of five to 15 per cent. Diesel variants of top-selling models such as the Maruti Suzuki Swift and the Hyundai i20 are also offered at a discount.

At the end of the quarter ended June, car sales fell 10 per cent, while sales of heavy trucks slid 18 per cent, according to data provided by the Society of Indian Automobile Manufacturers. In July, car sales reported the ninth consecutive monthly fall, while utility vehicle sales saw a fall for the first time in four years.

Currently, 30-60 per cent of the installed capacity to produce passenger vehicles (cars and utility vehicles) and commercial vehicles (trucks and buses) is lying idle, manufacturers say.

TOO MANY BUMPS

• A duty rise of 30% on SUVs in the Union Budget 2013
• Inflation
• Costlier fuel
• Higher loan rates

Various automobile companies, especially commercial vehicle manufacturers, are shutting factories on working days to avoid unwanted pile-up and restrict day-to-day costs. Maruti Suzuki, India’s largest car maker, slashed production 25 per cent at its Gurgaon and Manesar plants, while Chennai-based truck and bus maker Ashok Leyland was forced to reduce the number of operating days to five days a week.

In one of its biggest lay-offs, utility vehicle and tractor major Mahindra & Mahindra (M&M) axed 1,000 jobs in a little more than a month. The move was aimed at containing production and realigning projections. Pawan Goenka, president (automotive and farm equipment sectors), M&M, said, “We had made projections at the plant based on the 20-25 per cent growth we had had seen every month. Now, the plant is operating for 16-17 days a month. There could be more lay-offs to the extent of the slump in the market.”

By March-end, M&M grew 26 per cent, primarily due to robust demand for its sports utility vehicles, but the fact that duty on these was raised to 30 per cent in the Union Budget led to a 27 per cent sales slump last month.

Now, demand is dependent on a handful of new products. Tata Motors, which posted an operating loss of about Rs 400 crore for the quarter ended June, saw demand for passenger vehicles plunge 43 per cent during the quarter. New products such as the Ford EcoSport, Honda Amaze, Maruti Suzuki Ertiga and Chevrolet Enjoy, along with seasoned products such as the Maruti Suzuki DZire, were a handful of models that defied the downturn.

“I have not seen such steep, consistent declines (in sales) in 15 years. The mood in the market is a lot subdued; consumer sentiment has taken a huge knock,” said Volkswagen Passenger Cars India Managing Director Arvind Saxena.

Despite the bleak situation, several companies raised prices in the wake of rupee-led cost increases and general inflationary pressures. Companies say though the increase wouldn’t fully offset the rise in costs, it would ease the margin pressure to an extent.

C Ramakrishnan, president and chief financial officer, Tata Motors, said, “Margins will continue to remain under pressure on account of higher marketing expenses.”

The sector is trying to scout for ways to conserve cash and reduce costs. Ashok Leyland, which reported a net loss of Rs 142 crore during the April-June quarter, has slashed its capital expenditure for this financial year to Rs 400 crore from the planned outlay of Rs 1,500 crore.

To adjust production with demand, Bangalore-based Toyota Kirloskar declared an eight-day production holiday every month. Also, a decision on a new diesel engine plant has been delayed. The company has also scaled down the outlook for this year — against estimated sales of 300,000 units, Toyota has said its sales wouldn’t exceed 190,000 units, the figure recorded last financial year.

Among the worst hit are automobile component makers, especially those supplying to the commercial vehicle segment. Having set up capacities on estimates provided by vehicle makers, parts suppliers are struggling to meet even working capital needs. This has forced many to lay off workers. Pankaj Mittal, chief operating officer, Motherson Sumi Systems, said, “The situation in India is not as good as it should have been. We are working with car makers to align ourselves with their projections. Last year, we invested Rs 1,100 crore in capital expenditure; this year, we are investing Rs 800 crore.”

India Ratings has downgraded the outlook for India to negative, the first time in six years. “The outlook reflects the structural weakness in the passenger vehicle segment in terms of high capacity additions and intensifying competition which may potentially become entrenched in the industry structure,” India Ratings said in a report. According to the agency, domestic passenger vehicle volumes are expected to decline 5-12 per cent this financial year, led by a likely 8-15 per cent annual decline in car volumes.

Amid the gloom, a bountiful monsoon has provided a ray of hope. This is because it is expected to result in a rise in income and spending in rural, agriculture-dominated areas. Tractor sales have increased about 20 per cent in the quarter ended June, and it is estimated other automotive segments would gain from a rub-off effect.