Auto makers bet gloom will lift

Auto makers bet gloom will lift

Mumbai: Amid the slowdown in the market and ambiguity over policy decisions, some Indian auto makers are betting that the gloom will lift in time for substantial investments in boosting capacity to pay off, joining other segments of corporate India that have a counter-intuitive, strongly optimistic outlook on the economy.

At least three auto makers—Mahindra and Mahindra Ltd (M&M), Maruti Suzuki India Ltd and Hero MotoCorp Ltd—have announced plans for factories with a combined investment of more than 11,750 crore.

They are not alone in bucking a trend recently reinforced by gross domestic product growth slowing to a nine-year low of 5.3% in the quarter ended March. On Thursday, Mukesh Ambani said Reliance Industries Ltd (RIL) will invest 1 trillion across its various businesses, anchoring itself firmly to expectations of a bright future growth cycle for India, amid global uncertainties.

“India is poised to be one of the growth engines of the global economy over the next decade," Ambani told RIL shareholders at the company’s annual general meeting.

As with that company, the auto makers, too, have hurdles to overcome. Apart from the uncertainty associated with demand, companies will have to grapple with land acquisition issues, said analysts.

Pawan Goenka, president (automotive and farm equipment sectors) at M&M, explained the rationale behind investing in new capacities when demand is sluggish.

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Mint’s Shally Seth Mohile says M&M, Maruti Suzuki and Hero MotoCorp have announced plans for factories with a combined investment of nearly 11,750 crore despite muted market growth

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“In the auto sector, the investment cycle can never be matched with the boom cycle," he said. “If we hadn’t invested during the downturn of 2008-09, we would have missed riding the wave when the demand returned."

While some companies may have excess capacity, that’s not a reason for others to keep from investing in new ones, Goenka said. M&M is India’s biggest maker of utility vehicles.

“We have seen what happened in Singur," said Tarandeep Ghai, principal at Boston Consulting Group, referring to Tata Motors Ltd having to give up plans to produce the Nano at the West Bengal site owing to protests over land acquisition. It’s becoming increasingly difficult to acquire land for new projects, he said.

M&M’s Goenka agreed. “The process of acquisition sometimes takes from nine months to a year," he said, given that auto companies need large parcels of land—as much as 500-700 acres.

Goenka said states with land banks are better positioned to attract investments than those with none. Starting from the current fiscal year, M&M plans to invest a total of 5,000 crore in the next three years to expand existing capacity and to set up new factories.

It makes sense for firms to expand capacities, with demand fundamentals such as growing per capita income and relatively low car penetration continuing to be favourable, said Mahantesh Sabarad, senior vice-president (equity research) at Fortune Equity Brokers (India) Ltd.

However, the preparedness of suppliers to align their capacities with those of the auto makers could be a limitation.

“Most of them (suppliers) are under-capitalized," Sabarad said. Typically, an auto company builds a plant with the objective of it being able to serve a model for three stages of its life cycle. Very few suppliers are able to sustain beyond the first one, he said.

Auto component makers, whose contribution to an automobile can be as high as 75%, are required to make a consolidated investment of $1.5-2 billion (Rs 8,300-11,100 crore) every year to stay in step with the expansion plans of auto makers, said Arvind Kapur, chairman and managing director of Rico Auto Industries Ltd, and president of the Automotive Component Manufacturers Association.

To be sure, auto firms are trying to ensure that challenges such as the over-leveraging of balance sheets at auto parts makers can be overcome.

At its vendor meet in Bangkok last month, India’s biggest car maker Maruti Suzuki proposed that tier I suppliers help the smaller tier II and tier III suppliers with the sourcing of funds. The combined investment by all its suppliers needs to be doubled to ensure that Maruti Suzuki meets the target of selling two million units in 2015-16, according to one of the suppliers who attended the meet.

Japan’s Yamaha Motor Co. Ltd will also set up its third and largest manufacturing facility in Asia on the outskirts of Chennai, investing 1,500 crore over five years. Other two-wheeler makers that have announced investment plans include Hero MotoCorp, which announced a total of 2,575 crore of investment on 4 June. Honda Motorcycle and Scooter India Pvt. Ltd said in January that it will invest 1,000 crore in fiscal 2013.

Passenger car makers aside from Maruti Suzuki are yet to announce expansion plans, owing to the ambiguity in various policy decisions, which is of a piece with the government’s inability to get its act together on pushing reform measures through largely because of resistance from coalition allies.

Hyundai Motor India Ltd, for instance, hasn’t yet firmed up a proposal to set up a diesel plant because of uncertainty over the government’s fuel policy. A diesel subsidy, which makes petrol costlier at the pump, has boosted the proportion of diesel-run cars sold, but the government is said to be considering ways of closing the price gap. The government is veering toward imposing higher excise duty on diesel cars, Mint reported 7 June.

Top executives of auto firms met senior finance ministry officials to lobby against the government’s plan to levy additional excise on diesel vehicles on Wednesday.

Should the government go ahead with such a decision, “it could jeopardize plans of companies that have or plan to invest heavily in diesel engine technology", Goenka of M&M said in Mumbai on Thursday.

It’s also likely to have an impact on the 11-13% growth the industry has projected for the current fiscal, he said.

According to Goenka, the additional duty will not solve the problem, but only kill demand. A better solution would be to increase the diesel price by 2-3 a litre and reduce the petrol price by 6-7. This will bring in higher revenue and bridge the price differential, he said.

Volkswagen AG said on 17 May that it has put on hold a proposed 2,000 crore investment plan in India as a dispute over value-added tax refunds with the Maharashtra government hasn’t been resolved.

“The normal investments required for usual operations of the company are going on, but the big plans for the future have been put on hold at the moment," John Chacko, Volkswagen Group chief representative for India, told PTI.

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