Lower gear

While most of the auto industry continues to remain in denial, there is little doubt that the sector appears headed for a suddenly bumpy road.

The sales figures so far this financial year have flattened, there have been supply bottlenecks because of new emission norms for trucks, inventory levels have climbed almost across the board, raw material prices are high and have squeezed margins, and the tempo in the market has changed.

All this is without the long-awaited increase in petrol and diesel prices; should those price announcements be as steep as expected, then sales could take an immediate tumble.

Yet most auto companies continue to function as though they are still in a boom market, and are announcing new models as well as price discounts, while embarking on ambitious capacity building.

In short, they are burning cash instead of conserving it. It is time the industry recognised that the market is into a new phase, and trimmed sales forecasts as well as spending. Otherwise, there will be a harder application of brakes a little further down the road.

The numbers tell their own story. Growth in the commercial vehicle segment, upwards of 30 per cent over the last two years, was down to barely 2 per cent in the first quarter of the year, while that for cars has come down from 17-18 per cent to around 10 per cent (helped mostly by growth in one sub-segment).

Two-wheelers haven’t seen too much of a change, and have even held margins, but the signs of a slight slowdown are visible even here. Overall, the industry’s numbers are flat after about three years of rapid growth.

Even the more optimistic estimates by investment analysts, such as ASK Raymond James, put commercial vehicles growth at 12-15 per cent for the next few years, while the more pessimistic ones, like those by Crisil, talk of barely 5 per cent growth this year. The industry will do better than these numbers only if export performance is good. But a squeeze on margins seems inevitable.

The reasons for the market entering a new phase are obvious if you look for them. For a start, there is the effect of a larger base because of two years of rapid growth—this is not a market where you can keep expecting 20-30 per cent growth year after year.

And while it is true that interest rates haven’t firmed up by much, the days of lower EMIs (equated monthly instalments) belong to the past, and consciousness of this will have begun to tweak consumer sentiment.

In the case of commercial vehicles, a factor driving the slower growth is the rapid replacement of the fleet that took place in the last couple of years. Truckers therefore do not need to replace old vehicles to the same degree today, and will buy when they need to add to their fleet, not for replacement.

Finally, if manufacturers decide that growth is indeed slowing and therefore they need to shore up sagging bottom line by jacking up prices (because growth won’t do the trick any more), that will have the knock-on effect of prompting the postponement of purchase decisions.

Long-term, the Indian auto market remains a good news story. But that is not to deny the existence of cyclical demand. And the signals right now point to the cycle having turned in the last few weeks. The industry needs to recognise this and shift into a lower gear.