New Delhi: India’s automobile firms are gearing to ease production as rising lending rates dampen sales and cause inventory to pile up at factories and in dealer outlets.
With lending rates rising by as much as five percentage points in the past six months and the central bank tightening money supply to rein in inflation, cumulative sales of automobiles have fallen by 5% in April and May to a combined 1.52 million units, compared with 1.6 million units a year ago. That’s the first decline in at least three years, during wh-ich the Indian auto market has grown at double-digit rates.
The overall economy has grown at more than 9% in fiscal 2007 and the government’s efforts to cool parts of the economy appears to be paying off. The rate of inflation, measured by the wholesale price index, has fallen to 4.8% for the week ended 2 June from a six-month high of 6.73% in the week ended 3 February.
But along with inflation, co-nsumer appetite for big-ticket durables is also taking a hit.
“I had to cut production in April and May,” said Arvind Mathew, managing director and president of Ford India Pvt. Ltd, the Indian arm of Ford Motor Co. “These two months were soft but if this continues, then we will have to revise projections.”
Ford India reported a 5% dip in sales in the first two months of fiscal 2008. The “customer base has kind of dried up as we haven’t seen relief in money supply, even though inflation has come down,” said Mathew.
A recent report by Credit Suisse First Boston says the slowdown in car sales will last at least until the festive season at the end of the monsoon. Sales are traditionally better after the monsoon. A good monsoon typically leads to an increase in farm disposable income and, combined with Dussehra and Diwali, helps drive sales of durables. The result is typically better sales in the second quarter in comparison with the first.
To offset the anticipated slowdown this year, car makers such as Maruti Udyog Ltd are offering larger discounts and special financing schemes to encourage buyers.
“We have not revised our projections so far, (but) we would like stocks to be lower,” said Jagdish Khattar, managing director of Maruti Udyog, which sells half the cars made in the country. “We are working towards it. Let’s see.”
“The market is now ‘manuf-acturer-driven’ rather than ‘financier-driven’ as was the case six months ago,” writes Govindarajan Chellappa of Credit Suisse. “Car firms are offering low interest rates by paying the difference to financiers.”
The sector, which has been the hardest hit due to lending rates, is the two-wheeler sector, the entry-level segment for motorized vehicle owners in the country. After more than four years of double-digit growth rates, two-wheeler sales fell for the first time in April and May, forcing manufacturers to cut down production. Cumulative two-wheeler sales fell 8% in this period.
Two-wheeler makers claim the worst may already be over, but note that future sales will depend on affordable financing. “We’ve bottomed out as far as we are concerned,” said Venu Srinivasan, chairman and managing director of TVS Motor Co. Ltd, the third largest two-wheeler maker in the country. Growth in the post monsoon season “will be based on the availability and rate of credit. We expect it (growth) to be flat in the second half and will produce in line with demand.”
TVS cut production in April and May by about 24% compared to 5% and 11% at rivals Hero Honda Motors Ltd and Bajaj Auto Ltd, respectively.
“Interest rates are likely to be a near-term dampener on sales,” writes Deepak Jain of Macquarie Securities in a recent note. “However, demographics and low penetration levels in the Indian market are likely to drive longer-term growth.”
The slowdown in sales is impacting auto components suppliers too. “Most of our major customers anticipate a slowdown in the industry,” said L. Ganesh, chairman of the Rane group of companies. “The interest rate will affect demand for commercial vehicles.”
“We’ll review it (production) at the beginning of the next quarter,” said Vinod Dasari, chief operating officer of Ashok Leyland Ltd, India’s No. 2 bus and truck maker. “Demand is there in terms of freight rates and freight availability and I hope interest rate soften.”
After three years of growing at 30% plus rates, sales of commercial vehicles have grown only at 3.6% in the first two months of fiscal 2008.