New Delhi: At India’s annual auto industry schmooze fest this year, the mood among local businessmen was one of introspection. Auto makers in the world’s second fastest growing major economy were faced with a new problem: slowing demand.
As if rising prices of fuel and manufacturing inputs were not enough, seven-year-high financing rates for vehicle purchases have begun to dampen demand.
“The Indian automotive industry is facing unprecedented challenges,” Ravi Kant told the annual gathering of Society of Indian Automobile Manufacturers, or Siam, in New Delhi. Kant, president of the industry grouping, is also the managing director of Tata Motors Ltd, India’s biggest auto maker.
“Demand is shrinking because of the lack of availability of consumer finance, high interest rates and the high cost of fuel,” he said, adding input materials have “witnessed massive increases.” More than half of vehicles sold in India are financed through credit.
In the past two years, steel prices have increased nearly 40%, copper prices are up 45% and natural rubber has risen 40%, Kant noted in the speech. “These factors are having a catastrophic effect on the bottom line of the Indian automotive industry.”
Shrinking demand: (left) Ratan Tata, chairman of Tata Motors with Ravi Kant, president of Siam and MD of Tata Motors at the Siam Annual Convention 2008 in New Delhi on Thursday. Harikrishna Katragadda / Mint
An industry representative said India’s passenger car sales may grow at close to 10% this year, slower than previously estimated because of rising interest rates and high commodity prices.
“The top line and the bottom line of companies has been impacted by the high cost of commodity prices and the availability of loans,” Siam director general Dilip Chenoy said. He had earlier predicted the industry may grow 12% to 13% this year.
Car sales declined in July for the first time in more than two -and-a-half years as higher interest rates and inflation curbed demand for vehicles. Sales fell 1.7%, the first monthly drop since November 2005, according to Bloomberg data, after a previous record year.
India’s passenger car sales rose for a sixth consecutive year to a record in 2007 as economic growth and tax cuts lifted demand for Maruti Suzuki India Ltd’s small cars and Hyundai Motor Co.’s hatchbacks. Car sales gained 12% to 1.2 million in the year ended 31 March from 1.07 million a year earlier, SIAM data showed.
Higher disposable income in India had spurred sales in the country earlier. Carmakers including General Motors Corp. and Nissan Motor Co. Ltd have announced a combined $6 billion of investments in India to expand in the country as demand slows in the US and Japan.
But latest data in August shows Japanese-owned Maruti Suzuki, which manufactures half the cars in the country, reported sales fell 9.2%, the first fall in five months.
The long-term estimate for car sales in India was intact, Chenoy said. But, despite the industry body’s expectation, the high interest rates and surging input prices—ranging from steel to nickel to rubber—are having an impact in the long-term.
It is resulting in the withdrawal, scaling-down or deferment of capital investments that would hurt the objective of the so-called Automotive Mission Plan, or AMP, which aims at making India a manufacturing hub of small cars and creating an additional 25 million jobs by 2016.
At the Siam convention, India’s potential to overtake global peers as consumers around the world, faced with record fuel prices, turn to smaller cars—the Indian industry’s mainstay—was evident.
Commerce and industry minister Kamal Nath said auto exports from India should reach $25 billion in the nextdecade.
By the middle of the next decade, India should be the destination of choice for design and manufacture of automotive components and vehicles, he said.
Mint’s Shally Seth contributed to this story.