Car sales growth to hit a decadal low

But one set of retailers are yet to see the real action: they are the car dealers. With another global recession looming large, rise in fuel cost and interest rates, there are fewer car buyers today than in the previous year.

As a reflection of the somber mood, the well-known credit rating agency, CRISIL’s research wing CRISIL Research, in a report on the car industry, has predicted that the growth in passenger vehicles to decelerate sharply to 2-4 per cent with domestic cars sales growing at a mere zero to 3 per cent. Contrast this with the 30 per cent growth in domestic car sales in 2010-11, you understand the gravity of the situation.

In fact, as the current financial year unfolded, looking at the declining trend, CRISIL itself downgraded growth projections from earlier 8-10 per cent. It revised the forecasts downwards on account of rise in petrol prices and hiking of the interest rates. CRISIL expects the car sales growth to touch the levels comparable to 2008-09, when the domestic car sales grew at a rate of only 1.4 per cent due to global recession. “This would be only the second time in the decade when industry will grow at sub 5 per cent,” CRISIL said.

The car sales data from industry body SIAM also proves the point. During the April-August 2011 period (5 months), the industry sold 2,44,880 small cars, like Spark, Santro, Alto, Wagon-R, etc; nearly 3 per cent lower than the same period in 2010. The scene in compact cars, such as Beat, Figo, i10, i20, Micra and Fabia, is even worse as the industry’s combined sales at 3,00,544 was 7 per cent lower in April-August 2011 period.
Only those who launched new models during this period, did better than last year.

“OEMs and dealers interactions indicate a situation of higher inventory and discounts for most models and high waiting periods for diesel models arising out of capacity constraints for the same.” The report was mainly referring to the ongoing labour problem at the Manesar plant of Maruti Suzuki. According to industry estimates, Maruti’s new Swift has a delivery backlog of 1,00,000 cars.  According to Advaith Hyundai General Manager Ajay Singh, “The festive mood is yet to pickup this year among the car buyers. In the last few days, we have seen a rise in enquiries but the customers are taking much longer to close the deal as they are shopping around for the best interest rates.”   

Rising cost

Though intense competition among the players has kept car prices under check, and car dealers also offer many attractive discount schemes, this rising cost of ownership is now a big problem. Between May and September 2011, the price of petrol has gone up by Rs 9 a litre and the price of diesel by Rs 3. In the last one year, the Reserve Bank of India raised the interest rates 11 times by 450 basis points making car loans very expensive. As a result of the hike in oil prices and interest cost, CRISIL revised growth in car demand downwards from 8-10 per cent to 0-3 per cent.

The rise in petrol prices and yet another rate hike of 25 bps in interest rates by the RBI at the start of the festive season will impact the consumer sentiment negatively causing the industry to grow at a much lower rate than previously anticipated, the report said. CRISIL estimated that the cost of owning a car has increased significantly by 12-14 per cent due to frequent increases in fuel price and interest rates.

“Since its deregulation in June 2010, petrol prices have increased by 37 per cent. In this fiscal alone, the prices have increased by 13 per cent. Hence, fuel cost for driving a typical compact car has increased significantly by 30-35 per cent in 2010-11,” the report said.
Prospective buyers have to contend with increasing EMIs as well as RBI raising interest rates four times within the first 5 months of 2011-12. While automobile financiers have not fully passed on the increased rates to end users, uncertainty regarding their decision to pass on the rate hikes coupled with the burden of EMIs (equated monthly installments) of other loans would impact demand for cars.

“Typically, higher interest cost affects middle class buyers more because the higher classes. The EMI compels them to think twice before buying a car. For rich people, it matters less,” said Maruti Suzuki Chief Marketing Officer Shashank Srivastava.

Change in preference

Much lower price of diesel is also shifting consumer preference for diesel car as demand drifts towards diesel but limited capacity for diesel engines will limit growth in the future. Diesel prices too increased by 9 per cent during the year but difference in the prices of the two fuels will continue to remain high (43 per cent), the CRISIL report stated. Hence, the demand for diesel cars increased significantly, far outstripping the available diesel engine capacities at the OEMs. While investments were made in expansion of diesel engine capacities during the year, most of the new capacities are likely to get commissioned only in 2012-13 limiting domestic sales growth in the current year. It is also true that OEMs (original equipment manufacturers) have refrained from rapidly ramping up diesel engine capacities owing to uncertainty of government policy with regards to pricing of diesel and higher taxation on diesel cars. Strong rumours that the government would levy hefty duty on diesel cars made companies hold back investments.

Labour issues

On top of all this, Maruti Suzuki’s labour issues at its Manesar plant has resulted in the disruption of production, adding to the woes of the industry already reeling under the impact of a slowdown in demand, CRISIL said. This is because the company accounts for nearly 45 per cent share of the total cars and utility vehicles industry. Maruti manufactures compact cars, Swift and A-Star, and sedans, Swift Dzire and SX4, at the plant. Production of Swift Dzire was shifted to the company’s Gurgaon plant. However, production of Swift, which was re-launched in August 2011, has been severely affected. Maruti is currently expanding its capacity at Manesar plant from 0.25 million to 0.75 million by 2012-13.

After the new capacities get commissioned in 2012-13, the plant’s share in total installed capacity will double from 20 per cent currently. Timely resolution of these labour problems is critical to the industry growth. Should production at Maruti remain constrained due to strikes for a prolonged period, industry growth will be severely impacted, the report added. The CRISIL study also published information after talking to a large number of dealers of the major brands. It found that dealers and OEMs are viewing festive season with caution and they indicated lesser enquiries and footfalls as compared to that of the festive seasons in the previous years. Dealers are carrying higher levels of inventory on petrol models owing to a major shift in demand towards diesel vehicles. On an average, inventory at dealers’ end for petrol models is as high as 25-30 days against an inventory of 15-20 days a year ago, the report said.

To lure customers, dealers are also offering discounts higher than previous years especially on petrol variants of most models by around 25-30 per cent. OEMs are engaging in marketing activities like reduction in prices (for example, reduction in prices of Honda’s City and Jazz) and special lower pricing for certain models (for instance Hyundai’s i10) in order to boost their sagging sales. Dealers also indicated that waiting periods for petrol models have declined significantly while the waiting periods for diesel variants are as high as 5-8 months. In the case of Hyundai’s Verna and Maruti Suzuki’s Swift, for instance, the waiting periods are as high as 8-10 months.