Mumbai: Higher exports and robust sales of cars, bikes and tractors in rural India have come to the rescue of auto makers hit by anaemic demand in the cities, where the weakest economic growth in a decade is taking its toll on consumer confidence.
Auto makers have sharpened their focus on overseas markets to offset slowing sales growth in India and higher import costs resulting from the steep depreciation of the rupee, which has retreated 13.5% against the dollar this year. The rupee’s depreciation has also helped the export thrust.
In the five months from April to August, exports of passenger vehicles rose 12% to 251,386 units while domestic sales fell 5% to 984,761 units, according to the Society of Indian Automobile Manufacturers.
Motor India Ltd, the local unit of the Korean auto maker and India’s biggest car exporter, shipped 120,108 units in April-August, up 8.22% from a year ago. Home-grown auto makers like Tata Motors Ltd and Mahindra and Mahindra Ltd (M&M), too, saw exports rise 16.2% and 11%, respectively, albeit on a low base.
Volkswagen Group Sales India Pvt. Ltd, the local arm of the German car maker, shipped 9,528 units between April and August, a fourfold jump over last year.
Toyota Kirloskar Motor Pvt. Ltd has also been increasing exports steadily, said managing director H. Nakagawa. The local content across Toyota’s model line-up is 50%, he said. To offset its inflating import bill, Toyota has commenced exporting the Etios sedan to South Africa.
The higher overseas shipments, mainly destined for emerging markets, and sales in rural India are providing a degree of comfort to auto makers at a time when demand in the big cities has been eroded by the economic slowdown, high interest costs and rising fuel prices. Automobile sales slumped year-on-year for eight months in a row before recovering slightly in April
The economy grew 5% in the year ended 31 March, the slowest annual pace in 10 years. The rate of economic expansion was 4.4% in the quarter ended June, the slowest quarterly pace in four years.
Shoring up exports, however, has its fair share of challenges, said Kenichi Ayukawa, managing director and chief executive at car market leader Maruti Suzuki India Ltd.
Maruti Suzuki, which exported 120,000 units in fiscal 2013, expects exports to remain flat this fiscal. “With currencies in most of the emerging markets weakening against the dollar, it’s not going to be easy,” said Ayukawa.
Analysts agree that sustaining overseas demand wouldn’t be easy.
“Indian auto makers are exporting primarily to emerging markets. Even as the export story sounds good, executing it on the ground has not been easy,” said Joseph George, an analyst at domestic brokerage firm IIFL Ltd. He added that companies are likely to cut prices in the export markets to prop up sales volumes.
Demand in rural India, which has benefited from a healthy monsoon, rainfall has also provided some succour to auto makers in these hard times.
Arun Malhotra, senior vice-president (sales and channel development, automotive sector) at M&M, said the rural market contributed 35% of the company’s sales in the last fiscal and he expects the share to rise in the current year. Sales have been driven by the Bolero and Scorpio utility vehicles, he said.
Mayank Pareek, chief operating officer (sales and marketing) at Maruti Suzuki, said the company’s rural sales had jumped 20% in the four months to July and are expected to increase in the coming months. The hinterland accounts for 32% of the company’s total sales.
“Of late, it’s the rural sales that are holding on,” said Anil Dua, senior vice-president (sales and marketing) at Hero MotoCorp Ltd, India’s largest two-wheeler maker.
Any form of cash infusion by the government into rural India will prop up demand for two-wheelers and other household goods, Dua said, referring to better minimum support price for crops and other incentives that the villages typically receive ahead of elections, which are due around May next year.
While Hero MotoCorp and Maruti Suzuki, which have been traditionally strong in rural India, are strengthening their presence to fend off competition, their rivals are drafting marketing strategies to woo rural buyers.
Hyundai Motor India, for instance, is appointing so-called “Hyundai Champions” or rural sales consultants to promote its range of cars in the villages, according to Rakesh Srivastava, its senior vice-president for sales and marketing.
“In 2011, around 15% of Hyundai’s sales came from the rural and semi-urban markets. In 2012, it expanded to 16.9%. In 2013 (first half of the calendar year), sales grew to 18.6% and we expect it will increase to over 20% by 2014,” said Srivastava.
In a bid to tap demand in the festive season, Hyundai is offering customized schemes for farmers, traders and panchayat (village council), members. It also plans to increase its rural sales outlets from 270 to 350 by the end of this year, according to Srivastava.
Hero MotoCorp, which drew 46% of its sales from rural areas in fiscal 2013, has also been honing its rural strategy. The Delhi-based firm, which has a separate division to deal with the rural market, has its marketing and sales promotion initiatives linked to the crop cycles, said Dua.
Hero has close to 1,200 custom-made bikes to cater to rural customers. For instance, it offers a bike with an adjustable suspension and higher ground clearance. The suspension can be easily altered without any tool, said Dua.
The road to rural India may not be equally smooth for all the companies driving into the market, said Kumar Kandaswami, senior director and country leader overseeing the manufacturing practice at consultancy Deloitte Touche Tohmatsu India Pvt. Ltd.
Rural buyers need a model that fits them, he said. “Very few manufacturers have the right product (to succeed in rural markets),” he said.
Tractor makers have benefited from the good monsoon, with sales of the farm vehicles rising 18% to 275,332 units in the five months to August from 232,894 units in the year-ago period, according to the Tractor Manufacturers Association, a lobby group.
Sales were led by tractor market leader M&M, whose sales rose 20% to 107,204 units in April-August compared with 89,336 units a year ago.
M. Venkatesham, a sugar cane farmer based in Machnoor village in Zahirabad district of Andhra Pradesh, bought a second Mahindra tractor six months ago. His disposable income has increased thanks to the higher price he gets for the crop. “From Rs.90 per tonne two years back, I get Rs.110 now,” said Venkatesham, who plans to buy a third tractor once he pays off the loan on his two tractors
Rajesh Jejurikar, chief executive of M&M’s tractor and farm mechanization unit, is optimistic that sales growth in the second half, too, would remain healthy. The company has its tractor plants running at optimal capacity, he said. M&M is ramping up capacity at its plant in Zaheerabad in Andhra Pradesh.
At the end of fiscal 2014, the output is forecast to rise from 60 tractors per day to 100 per day, said Jejurikar, adding that the company expects the tractor industry to end the year with 10% growth against the estimated 6%.
Tafe Ltd, India’s second largest tractor maker by sales, also saw its sales rise 20% to 68,395 units against 56,609 units in the April-August period, said a company spokesman.
Meanwhile, sales of used or second-hand cars has seen a surge as buyers postpone new car purchases, offering auto makers another sweet spot.
The market for used cars is largely unorganized. Mahindra First Choice Wheels Ltd and Maruti True Value are among the few organized firms in the space.
The used car market in India is estimated to be 2.8 million units a year now and expected to touch 7.8 million units by 2017, according to Nagendra Palle , chief executive of Mahindra First Choice—the used car business of M&M.
Mahindra First Choice’s sales increased 40% to 4,300 units in August compared with last year. It plans to sell 65,000 units by the year end, Palle said.
The rising demand for used cars also has a downside. Deloitte’s Kandaswami cautioned that with more people opting for used cars, the availability of quality cars is going to be an issue.