Vote on Account 2014: Fortunes of auto industry have nosedived in past few years
Partner & National Leader - Automotive practice, EY
Just a couple of years ago, who would have thought that the Indian passenger vehicle (PV) market will finish the year 2013 in red. The fortunes of the Indian Automotive Industry have nosedived in the past few years - From a market that was growing at more than 20-25% annually to the one where most market segments are witnessing a sales decline despite record discounts. The market has proved all forecasts wrong. The economic slowdown coupled with low consumer sentiment, high inflation, rising fuel prices and interest rates has changed the way automakers viewed the Indian market and forced them to rework their India strategy.
The last year, in particular, has been one of the worst that the industry has seen. All the market segments, except two wheelers, have been declining continuously. The inventory levels at vehicle dealerships continue to remain very high. High discounts being offered to push sales are negatively impacting the bottom line of automakers and dealers. To match the decline in demand, automakers have resorted to production cuts and lay-offs, due to which capacity utilization for most automakers remains at a dismal level.
PV sales continue to decline; rural sales, vehicle exports and new model launches drive sales growth
PV sales in India continue to decline and the market has come down by 7.5% during 2013 - All three PV sub-segments - Passenger cars, Utility vehicles and Vans have witnessed sales declines.
Despite the decline in overall PV sales, there have been a few bright spots such as robust growth in rural sales on the back of a strong monsoon, export growth of 7.6% during the year on the back of the Rupee depreciation, and a strong growth in used car sales. Also a few new launches in segments such as Compact/Super compact and Compact SUV have managed to hit the sweet spot and are generating strong sales volumes.
Interestingly, despite the overall market being under severe pressure, the luxury car market has witnessed a strong double-digit growth during the year, albeit on a low base, as a result of successful new launches at significantly lower price points. Further, with the gradual increases in the price of diesel (as a result of partial deregulation), the overall market continues to shift towards petrol-fuelled cars. As a result, the 'Mini' segment of the PV market (with more than 90% of cars sold being petrol-fuelled) has witnessed sales growth of 5.5% during the second half of the year.
CV sales slump despite the heavy discounts offered by vehicle manufacturers
The sales of commercial vehicles (CV) declined by 15.6% during 2013. Apart from the economic slowdown, the CV demand has been negatively affected by a decline in industrial output, a gradual rise in diesel prices, a slowdown in new infrastructure projects, and a ban on mining in certain states. The medium and heavy truck segment has been hit particularly hard.
LCV (Goods carrier segment) was the only segment that witnessed growth during the period, primarily contributed by the Pick-up truck segment (2-3.5 tonnes). However, the pick-up truck segment also slipped into negative growth in November and December 2013 as the industrial activity slowdown also seeped into the segment.
The bus segment has also witnessed 17% decline in sales as the phase-2 of the JNNURM scheme did not pick up as strongly as it did in the previous phase.
Two wheelers defy the overall industry trend, witnessing growth in scooter, performance motorcycle and entry-segment motorcycle sales
Two wheelers, the only segment in the Indian automotive market to witness growth, registered a sales increase of 3.9% during 2013 as a result of a strong rural demand and rising popularity of scooters. The largest sub-segment of the two wheeler market, Entry-level motorcycles (from 76 to 110cc), witnessed a moderate growth of around 1.8% on the back of new product launches and improved distribution network in rural India. Changing consumer preferences and new model launches have led to a significant jump in scooter (grew by 15.8% during the year) and (above 200cc) performance motorcycle sales (grew by 38%, albeit on a low base).
The year also witnessed some big partnerships and acquisitions by the Indian manufacturers. Bajaj increased its share in KTM, TVS joined hands with BMW and Hero MotoCorp's alliances with AVL, EBR, Engines Engineering and Magneti Marelli clearly show the intention of Indian manufacturers to strengthen their product development capabilities amidst growing competition from global players and also expand their foothold in the international market.
Market outlook: Sales likely to return to growth during the last quarter of 2014, auto expo expected to help generate some momentum, however, outcome of elections remains critical.