Auto makers shutter lines as downturn gets worse

Auto makers shutter lines as downturn gets worse

New Delhi / Mumbai: A slowing economy coupled with tightfisted creditors resulted in sales of cars, trucks, bikes and three-wheelers falling a sharp 18% in November from a year ago, raising concern that the decline in the key manufacturing industry is nowhere near bottoming out.

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e65413ac-c6dc-11dd-a00f-000b5dabf636.flvAt least one auto maker, Mahindra Renault India Ltd, said it was closing production for three months. Hyundai Motor India Ltd, the country’s second largest car maker, said it was shutting its Chennai factory for a day a week at, joining others such as Tata Motors Ltd and Ashok Leyland Ltd who have already effected such production cuts.

Several others among India’s 37 auto firms, say industry executives, have slowed production without formal announcements.

Industry representatives and analysts cautioned that they did not see sales reviving before March despite last weekend’s 4% excise duty reduction and a stimulus package announced by New Delhi, and a cut in the policy rate by the country’s central bank.

Also See Stalling Growth (Graphic)

“This is going to take a few months to shake off," said Rakesh Batra, a partner in the automotive group at Ernst and Young, an audit and consulting firm. “There is a fear psychosis setting in among consumers. They’re holding back on purchases particularly in the automotive sector."

Interest rates for automobile loans have been rising steadily from 8-9% two years ago to 15-16%. So far, banks have shown little willingness to drop loan financing rates or revive lending. The slowdown in economic activity has further dented commercial vehicle sales and banks have reported rising defaults from transport companies. Some 95% of trucks, two-thirds of cars, and at least 40% of bikes sold in the country are bought on loans.

Commercial vehicles were the worst-hit with sales falling 49.5%, the sharpest fall since January 1998, according to Siam, or the Society of Indian Automobile Manufacturers, an industry lobby group. Truck sales were down to 20,637 units in November. Siam’s data is based on despatches from auto makers to dealers.

Car sales were weaker by nearly a fifth at 83,059 units, a decline of nearly 20,000, in November compared with the year-ago month. Sales of passenger vehicles, which in addition to cars, include utility vehicles and multi-purpose vehicles, fell 23.71%, the worst performance in eight years.

The percentage drop in auto sales was amplified by the fact that the festival season centred around Diwali fell in November last year, making for a high base while calculating change this year. The exception to an almost-overall slide were multi-purpose vehicles, vans like Maruti Suzuki India Ltd Omni and Versa models. Their sales rose 12%.

Three-wheeler sales were down 23%, while two-wheeler companies sold 14.68% less scooters, mopeds and motorcycles in the month.

“The industry is registering negative growth in consecutive months and the extent of the contraction is much greater than the rate of contractions in 2000-01 when all segments performed poorly last time," a statement put out by Siam said. Total vehicle sales were 14.4% weaker in October; and passenger vehicle sales have fallen for four of the last five months.

Grim outlook

Sales are likely to fall further in December as buyers prefer to wait for the new year before buying cars. “Last year while December retail sales may have been weak, wholesale off take was robust given that dealers needed stock for January. This year that too is unlikely to happen," said Joseph George, an analyst at BNP Paribas Securities India Pvt. Ltd.

BNP Paribas found that in addition to consumer sentiment, dealer sentiment is particularly weak, according to a survey it conducted last month. The survey showed dealers in rural areas are more optimistic. Rising inventories have forced manufacturers to slow production or pull back India plans. A Seoul-based spokesman for Hyundai Motor Co. said his company will temporarily suspend its plan to sell commercial vehicles in India after a slump sapped demand worldwide.

At Mahindra Renault’s Nashik plant, the production schedule for December, January and February is zero for the only car made at the facility, Logan, at least two executives at vendor firms said. The executives, who attributed this to high inventory, did not want their names or those of their companies used for fear of hurting their business relationship with Mahindra Renault, a joint venture between Mahindra and Mahindra Ltd and Renault SA of France.

The venture’s chief executive officer Nalin Mehta remained unavailable for comment despite repeated assurances from the firm’s spokesperson that a conversation would be arranged with Mint.

Renault India’s vice-president, corporate affairs, Ashish Sinha Roy confirmed the shutdown in a phone interview. “We have not yet taken a decision on when production will restart. We don’t expect even the price cuts and the (excise) reduction that we have passed on to the customer today to help much to drive sales", he said. Mahindra Renault is offering the Logan at Rs3.99 lakh from 10 December, about Rs60,000 less than earlier.

Other auto makers are also offering attractive discounts to get sales moving.

Deals announced last week were among the best ever, according to dealers. Maruti, for instance, is offering Rs35,000 off on its popular WagonR model. The SX4 sedan is available for Rs15,000 less than its list price of Rs6.35 lakh. Fiesta, sold by the local unit of Ford Motor Co. is available until 13 December for Rs91,000 less.

These price cuts, partly a result of a cut in so-called central value added tax rates (part of excise duties) announced on Sunday, add to December discounts.

Companies are also targeting government employees and rural consumers in an effort to push sales. Hyundai Motor India says it sold about 7,000 cars to government employees in the last two months. Maruti has sold at least 30,000, a jump of at least 82%, vehicles to rural consumers in the first seven months of this fiscal.

One bright spot in data released Wednesday was exports. Passenger vehicle exports, mostly cars, jumped 120% and two-wheelers 51.16% —the highest year-on-year growth this year. The performance of commercial vehicles was dismal in exports too, falling by one-third in November, the second month in running when such business fell.