High interest rates, global slowdown hit car sales in India

High interest rates, global slowdown hit car sales in India

Mumbai: October was supposed to herald a revolution for Indian auto makers.

Tata Motors Ltd had planned to roll out the Nano, a Rs100,000 snub-nosed auto that would bring car ownership to the masses. But a major land dispute has delayed the Nano’s launch. And more worrisome: After years of double-digit growth, Indian auto companies face falling sales.

The country’s growing consumer base has not inoculated them from the global financial crisis. Battered by high interest rates and tight credit, auto sales began to shrink in the summer, falling 1.9% in July and August. After a mild comeback in September, reports from big auto makers suggest they fell again in October.

Sales reached 1.5 million cars last year, and the middle class is projected to grow from 50 million people today to 583 million by 2025, according to McKinsey and Co.

Toyota Motor Corp., Honda Motor Co. Ltd, Renault SA, Daimler AG and Volkswagen AG are all building new factories, and General Motors Corp. and Ford Motor Co. are ramping up production. But the short-term may present more challenges than opportunities.

The International Monetary Fund downgraded its forecast for India’s 2009 economic growth to 6.3% on Thursday, a sharp drop from last year’s 9.3%. The benchmark Sensex stock market index has lost more than half its value since the beginning of the year.

Analysts expect passenger car sales, which averaged 17.2% annual growth over the last five years, to grow just 6-8% this year.

The most recent quarter was a bleak one for India’s leading auto makers, who reported double-digit declines in profits for the July-September period.

Tata Motors said its profit fell 34.1% to Rs3.47 billion ($70.1 million). Nearly two-thirds of Tata Motors’ earnings come from sales of commercial vehicles, which have been hit by slower growth in industrial production.

Farmer protests also forced the company to halt construction of a $350 million Nano factory and find another site. The company says it will take 6-12 months to ramp up production to 250,000 vehicles at the new location.

Maruti Suzuki India Ltd, which sells almost half of all passenger vehicles in India, said net profit plunged 36.5% to Rs296 crore, because of rising materials costs and a falling rupee.

Mahindra and Mahindra Ltd, India’s largest SUV and tractor maker, said net profit fell 20.6% to Rs186 crore for similar reasons.

Tata sold 39,729 vehicles last month, 20% less than last year, and Maruti Suzuki reported total sales of 64,490 vehicles, down 7% from last year.

Eighteen months ago, car loans cost 7-9% a year; now they are running 17-18%, according to the Indian auto makers group.

Raw materials prices are falling now, and Ashutosh Goel, an auto analyst at Mumbai’s Edelweiss Capital Ltd, believes that lower interest rates will eventually help India’s auto makers. “I don’t think the long-term trend has changed," he said. “The auto industry is by nature cyclical. While we expect the long-term trend to be 15%, passenger car growth can fluctuate. Year to year, it might go from zero to 25%."