Chip shortage caught companies off-guard since supply chain not diversified: FADA President

The Indian automobile industry has faced the brunt of issues that have cropped up since the outbreak of the Covid-19

The Indian automobile industry, often seen as a barometer of how the economy is performing, has faced the brunt of issues that have cropped up since the outbreak of the Covid-19 pandemic -- be it the semiconductor shortage, rising raw material and fuel prices, the Russian war on Ukraine, or the global economic slowdown. However, in the past few months, segments of the industry have shown robust growth. Vinkesh Gulati, president of the Federation of Automobile Dealers’ Associations (FADA) tells DH’s Prathik Desai what this means for the industry.

Passenger car sales have outperformed pre-Covid figures in the last few months. Can we expect the industry overall to do similarly soon?

In India’s auto industry, two-wheelers account for about 70% of the market size, by volume. And this segment is not yet out of distress, with numbers still 15-20% below the pre-pandemic level. But if we take that category out, then the auto industry is booming right now.

In June 2022, commercial vehicle (CV) sales outperformed the June 2019 (pre-pandemic) figures on the back of increased government infrastructure spending and with the economy reeling back to normal post-pandemic. Passenger vehicles (PV) too have done phenomenally well, despite the chip shortage and other disruptive geopolitical factors.

The demand for tractors has also picked up consistently. In the three-wheeler segment, although it is not yet in the green, more than 50% of the segment is seeing electrification at a very good pace. Hence, we can say that the segment is growing in the right direction and will turn green very soon.

Looking at all these things, even with the existing challenges, we’ll still be closing this fiscal on a high, if no other external event happens.

Considering the growth in PV sales, what is the outlook for the segment?

We have seen the customer preference changing for cars in the last few years. The average price a consumer paid for a car was around Rs 5-7 lakh. That has now gone up to Rs 8-10 lakh. They want more features and, in a way, are looking to replicate their lounge at home in their cars.

The fact that compact SUVs now come with a host of features, exceeding customer expectations at a competitive price, which were once available only in the premium car brands, has increased the buyers’ ambitions. Due to this, despite the entry-level cars registering negative growth, compact SUVs have ensured the entire PV segment registers a healthy growth.

As per my estimates, this is going to be the best year for cars, with about 3.5 million PV sales in FY23, as against 2.8 million in the earlier year.

Maruti Suzuki attributed the fall in its utility vehicle sales in June to the “shortage of electronic components”. What do you have to say about it?

The semiconductor shortage has been an issue for the last two years and continues to be so. However, while every other OEM was complaining about the issue, we saw how Tata (Motors) resolved its issues a year and a half ago by finding substitutes to source its chips. The problem caught many companies off-guard since they didn’t diversify their supply chain. Some like Tata Motors and Mahindra did a phenomenal job at adapting to the situation and working their way around it while others were late to adapt.

Will the Bharat New Car Assessment Programme, which requires a star rating for cars based on safety, make cars more expensive?

With so many deaths happening on Indian roads, I think BNCAP is essential. The Ministry of Road Transport and Highways has done a good job with this. However, the problem with BNCAP is that it is not mandatory. Have a mandatory rating for all vehicles and let customers decide according to their budget and need. As of today, we are ready to pay more for superior features, so I feel it is more important to be safe and, hence, paying Rs 15,000 to 20,000 extra for a safer car shouldn’t be a problem.

You have been pushing for an exit policy for automakers who quit the Indian market. Why do we need one?

For a customer, an auto dealer is a face to trust while buying a vehicle. When an automaker exits, the dealers have to shut down and the customers are left without support. Look at General Motors. They came up with beautiful products, but five years after their exit, you don’t see any of their cars on road. A consumer doesn’t buy a car for just five years. Once the manufacturer leaves India, where will the customer go?

Dealer agreements are skewed in favour of the auto manufacturer in India. India’s FDI policies allow foreign automakers to come in freely and they don’t need permission to exit, either. Except for the labour laws, there are no other laws in terms of creditor protection and dealer protection. That’s where the policy hurts. If you leave out the big institutional dealers, about 80% of India’s auto dealers are run by small families with moderate turnover. When a manufacturer exits, these dealers face a lot of trouble.

There needs to be a clear exit policy. Automakers should be responsible to the dealer and the customer for 15 years. We have been pushing for a policy with various ministries. While they have been supportive, we have not been able to get anything on paper yet.