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The prolonged slowdown in the domestic automobile market claimed its first casualty last month when the country's largest car maker, Maruti Suzuki, asked around 350 contractual workers at its Gurgaon and Manesar facilities to go on indefinite leave in order to align production to demand.
Soon after, homegrown Mahindra & Mahindra, too, laid off 500 temporary workers amid production cuts and rising inventory. Last week, it went a step further and announced production holidays ranging from one to eight days for the rest of the month.
For the passenger vehicle manufacturers in the country, the mood clearly is pessimistic. Overall, the sector has cut back production by as much as 10 per cent to 215,146 units in June. For the quarter on the whole, production fell 10.06 per cent to 739,146 units as compared to 821,864 units in the same period last year. While demand for petrol vehicles has been going downhill for over a year now, diesel models too have started showing signs of strain in the last few months, largely due to the phased increase in the price of the fuel and an additional tax of 3 per cent levied on fuel-inefficient sports utility vehicles.
Excess capacity
According to industry sources, nearly one-third of the total diesel engine capacity is lying idle at Maruti Suzuki's Manesar plant. The company has discontinued the third shift at Suzuki Powertrain India, its diesel-engine manufacturing subsidiary, altogether. Some tough measures are next in order. The slowing demand has necessitated laying off of around 200 workers employed on contractual basis at the company. Things are no better at the manufacturing plants either. At Maruti Suzuki's Manesar and Gurgaon plants, production was slashed by a fourth to 61,668 units last month as compared to 82,626 units in June 2012. The company shut these two plants for a day in June, which was followed by a six-day scheduled maintenance closure later in the month. In July, production is likely to remain at the same level.
The cut-backs have come close on the heels of Maruti Suzuki registering a decline of 7.8 per cent in domestic sales at 77,002 units last month. Sales for the company slid across categories with even its best-selling models such as the DZire and Ertiga taking a hit. Exports too dropped 43 per cent to 7,453 units in June. In the domestic market, while sales in the premium hatchback category (Swift, Ritz, Estilo) went down 7.2 per cent to 20,996 units, demand for DZire contracted 8.7 per cent to 12,548 units. Sales in the utility vehicle space (Gypsy, Ertiga)-which had remained buoyant despite the downturn in the industry through most of the last financial year-fell 11.4 to 4,997 units as against 5,638 units in June 2012.
Widespread pain
The tapering off in demand for utility vehicles was seen in the numbers at Mahindra & Mahindra, too, which saw its volumes decline by 11 per cent to 19,944 units in June. S Sandilya, president of Society of Indian Automobile Manufacturers, says, "We were conservative in our growth projections, but, given the current scenario, we do not expect any segment to hold good to estimates except perhaps two-wheelers. The dollar-rupee exchange rate impacts us in more ways than one. Apart from scaling up input costs, it raises crude oil prices and this has a direct impact on our customers. High interest rates do not have a huge impact on equated monthly instalments but they affect borrowings for infrastructure projects which, in turn, slows down development in the economy. All these factors are being reflected in the slump in vehicle sales."
The numbers corroborate Sandilya's words. Overall, passenger car sales have fallen 10.41 per cent to 434,551 units in the first three months of 2013-14 against the growth projection of 3 to 5 per cent. Sales of utility vehicles (which are expected to grow by 11-13 per cent in FY14) have reported growth of only 5.27 per cent at 123,909 units in the June quarter of 2013.
While sales have been falling for seven months in a row now, the trouble on the forex front has further added to the woes of the sector. The rupee has depreciated 8.54 per cent against the dollar since the start of 2013, scaling up import costs. The rupee stood at 59.35 against the dollar on July 18 as compared to 54.68 on January 1. While companies across the board are tweaking their sourcing policies and working on increasing localisation levels to offset the adverse impact of foreign exchange fluctuations, in the mid-term the focus is additionally on boosting exports to put in place a natural hedge against currency fluctuations.
Shekhar Vishwanathan, vice-chairman, Toyota Kirloskar Motor, says, "For every depreciation of one rupee, our import costs increase by as much as Rs 90 crore per annum. While we have asked vendors to cut down on imports, it involves a lot of engineering changes. We additionally have to consider the cost aspect as well-sometimes it is cheaper to import from Indonesia or Thailand than to localise. It would take us about three years to reap the benefits of genuine localisation, but the process has now started. We do have a natural hedge and are trying to scale up exports to counter the adverse forex impact." Toyota Kirloskar Auto Parts has commenced supplies of gear-boxes largely to the market in Thailand. Toyota Kirloskar Motor has plans to export around 25,000 units of the Etios series to South Africa on a dollar-denominated basis, which would partially enable the company to counter the depreciating rupee.
Banking on exports
Maruti Suzuki, too, is increasingly looking at developing non-European markets for exports. A senior executive at Maruti Suzuki says, "As long as the rupee was at 54-55 levels against the dollar and the yen was depreciating, we were doing good. But now with the rupee touching 60 against the dollar, our import costs are on the rise." Maruti Suzuki has both direct and indirect exposure to foreign currencies and imports automotive components worth Rs 8,000 crore annually.
"While we are gaining on the exports front due to the depreciating rupee, we are losing out more due to increased import costs. The only answer is to increase localisation and step up exports, but it takes time. We are watching the dollar closely and would be looking for cover", he adds. The company had exported over 120,000 units in the last financial year.
Maruti Suzuki has hedged 80 per cent of its Japanese Yen/ US dollar exposure for the rest of this fiscal, the company was covered in dollar/rupee till the end of Q1.
Ford India, meanwhile, is mulling price correction to somewhat ease the pain from rising input costs. "Input costs for our business have been trending upwards due to the depreciation of the rupee. We are closely monitoring these trends so that we can take pricing action at the appropriate time. In the long run, we believe, the currency will strengthen as India's economic fundamentals still remain intact", says Vinay Piparsania, executive director (marketing, sales & service), Ford India.
However, despite the many odds facing the sector, there are some who believe that the downturn is well on its way out. Rakesh Srivastava, senior vice-president (sales & marketing), Hyundai Motor India, says, "The sales story should now take a positive turn. While Hyundai has been outperforming the market, the industry as a whole will now be working on the low base of last year. Growth momentum should kick-start. The monsoons have been good. Inflation and interest rates are stable. Discounts are at record levels right now. With the festive season approaching, traffic at showrooms should pick up."
