Indian automotive industry at crossroads

September 2015

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  • PV sales expected to reach around 4.0 to 4.5 million units by FY20
  • CV industry expected to reach around 0.9 million units by FY20
  • Expected reduction in logistics cost through GST implementation is 10–15%

New Delhi, 23 September, 2015:  The Indian automotive industry is facing testing times, surrounded by uncertainty on when sustainable growth and profitability will return, suggests the recent EY report titled, “Revving up! - Indian automotive industry at crossroads”. Though the economy is improving, and fuel prices are low, yet these are not translating into significant demand generation.

Commenting on the findings of the report, Rakesh Batra, Partner & National Leader – automotive practice, EY India, said, “Our analysis suggests that the fundamentals for the automotive industry’s growth drivers are intact, and we are likely to see greater uptick in demand in FY17 as the economic environment improves further. To translate the growth potential into reality, automakers need to identify profitable niches and introduce exciting new models, offer improved customer experience, invest in localization, and create flexible production capacity and supply chains to be able to quickly respond to changes in the demand mix”.

He further added that, “Indian automotive industry participants need to realign themselves as the market moves toward the next stage of evolution. Automakers need to re-evaluate their strategy in light of upcoming regulations such as end of life vehicles, and stricter emission and crash testing norms. The GST reform, in particular, is likely to change the transportation scenario, and industry players must start thinking about re-aligning their supply chain, and specifically the distribution network. This single reform will impact vehicle pricing, sourcing strategies, distribution costs and dealer profitability.”

EY report analyzes the emerging trends, issues and challenges impacting the stakeholders and recommends solutions for growth of the automotive ecosystem –

  1. Implementation of policy reforms critical to kick-start strong growth in the Indian automotive industry:
    1. Trends:
      1. INR 7.95 billion budget allocation for the FAME-India scheme during FY16–17
      2. INR 57.3 billion estimated market size of radio cabs, booked online or through calls in India (between Oct 14-Apr 15)
      3. 164% growth in FDI in the auto sector since the launch of “Make in India”
      4. 0.2 million reduction in road fatalities envisaged in the proposed Road Transport and Safety Bill during the first five years
      5. Expected reduction in logistics cost through GST implementation is 10–15%
    2. EY recommendation - Stakeholders should optimize their supply chain and distribution strategy in view of the likely introduction of GST and need to invest in R&D to develop products that comply with upcoming vehicle safety and emission regulations
  2. PV market likely to grow at a moderate pace in the short term; long-term prospects remain positive – The domestic PV sales is expected to reach around 4.0 to 4.5 million units by FY20 (CAGR of 9%-11% during FY15-FY20).
    1. EY recommendation - Invest in newer retail channels, both online and offline, and drive closer integration between them to ensure consistent messaging and sales lead management. Also, strengthen focus around allied businesses to drive vehicle sales and profitability
  3. CV industry to continue witnessing revival in demand, driven by economic recovery, urbanization and infrastructure development – the Indian CV industry is expected to grow at a CAGR of 7%-9% during FY15-FY20,  to reach around 0.9 million units by FY20.
    1. EY recommendation:
      1. Prepare for upcoming regulatory changes such as the uniform bus body code and tightening emission norm
      2. Explore innovative sales and service formats to widen reach and reduce vehicle downtime and leverage telematics services and analytics to differentiate offerings
  4. Two wheeler market growth to pick up after a hiatus in FY16 – the industry is expected to grow at a CAGR of 8%-10% during FY15-FY20 and reach around 25 million units by FY20.
    1. EY recommendation:
      1. Engage in collaborations/strategic M&As to gain access to technology and distribution network in global markets
      2. Invest in multi-channel marketing, CRM and aftersales service support to enhance responsiveness and consumer experience
      3. Drive innovation in retailing; leverage the growing role of digital in the consumer buying process
  5. Tractor market to remain subdued in the short term; witness moderate-to strong growth in the medium term – the industry is expected to grow at a CAGR of 8%-9% during FY15-FY20 to reach around 0.8 million units by FY20.
    1. EY recommendation:
      1. Engage in strategic collaboration with financial institutions to ease tractor financing
      2. Increase consumer touch-points to improve brand loyalty and customer satisfaction and deploy sophisticated analytics tools for better demand forecasting and inventory management in line with regional demand disparity
  6. Tier 1 suppliers to become a vital link in the global automotive supply chain as they restructure business and attain scale through global growth - The auto component industry is likely to witness growth in FY16 due to higher exports and recovery in domestic demand. Increased capacity utilization, operational restructuring and correction in global commodity prices will aid margin improvements.
    1. EY recommendation:
      1. Ensure a secure and efficient supply chain with stable/localized procurement and distribution and continue investing in R&D to co-own product development with the OEM
      2. Explore collaboration and strategic M&As to gain access to technology and new customer base
  7. Tire manufacturers to benefit from benign raw material prices and higher OEM sales as demand picks up in the automobile industry - the tire industry is expected to grow at a CAGR of 8%-9% during FY15-FY20 to reach around 200 million units by FY20.
    1. EY recommendation:
      1. Develop a robust distribution strategy and identify optimal retail mix between dealers, digital sales and company owned stores
      2. Differentiate product offerings and explore potential bundled services/solutions to manage the onslaught of low-cost imports
  8. Expected improvement in infrastructure development to drive demand recovery in off-road CV industry – the industry is expected to recover during FY16, assuming that the liquidity and finances do not become bottlenecks.
    1. EY recommendation:
      1. Increase localization content to meet price sensitivity and reduce import costs and explore collaboration/alternate service channels to ensure timely on-site support
      2.  Consider offering a structured equipment rental option for end-users
  9. Evolution of automotive retail to provide a consistent and enhanced customer experience across multiple channels
    1. EY recommendation:
      1. Explore newer sales and service formats to increase reach and optimize costs in light of high real estate rentals, and a discerning and diverse customer base
      2. Integrate customer experience across digital and physical touch points to ensure consistent messaging and sales lead management
  10. Automotive finance captives to play a crucial role in enabling OEMs’ sales growth agenda - with changing customer preferences and buying behaviour, automotive finance stakeholders need to focus on digital sales, flexible ownership and new products/services
    1. EY recommendation - Drive innovation in product design and adapt to unique consumer preferences and leverage analytics across the auto finance life cycle to maintain asset quality and profitability
  11. Automotive M&A activity in India being driven by the supplier sub-segment and significant PE/VC investments – suppliers have a 93% share by deal values (in the overall domestic automotive sector deals) in the last two years; also PE acquisitions account for a 59% share
    1. EY recommendation:
      1. Use need-based and strategic alliances, JVs and acquisitions to gain technology and geographic coverage and evaluate effectiveness of currency and raw material hedging strategies

 

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