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Event update: Automobiles - Industry Association Conference Takeaways

We attended conferences organised by various automobile industry associations (FADA, SIAM and ACMA), which included suppliers, dealers and original equipment manufacturers (OEM). Both, industry participants and government officials attended the conferences. Persisting uncertainty gave a sense that the downturn (brought on by a confluence of factors) may not be short lived. Key takeaways:

Downturn maybe prolonged: While the industry hopes for a recovery, the general belief is that the downturn maybe prolonged. Broad reasons for the downturn include a general slowdown in the economy, weak consumer sentiment, confusion surrounding BSVI/EVs, liquidity crunch and a rise in vehicle prices. The current downturn seems different from previous slumps (FY08/FY12), as the weakness is primarily due to domestic factors and has simultaneously impacted all segments. Further, the duration of the downturn is significantly longer than previous cycles. Hence, recovery could be drawn out; although views on whether the rate of de-growth has bottomed out are inconsistent. 

GST cuts could benefit demand: OEMs clamoured for a cut in GST rates, as the same led to an almost instantaneous improvement in demand in previous cycles. With deeper factors at play, the impact may not be as sharp as in the previous cycles, but could prove beneficial. It is noteworthy that expectations of a GST cut have reduced retail sales to a minimal over the last few days. Hence, greater clarity is urgently needed on whether a cut will be applied. The communication by government officials did give a sense that a GST cut is being discussed with seriousness, but there is no certainty as yet. Also, while it is likely that the government could introduce a draft policy on scrappage, the implementation could take some time as scrappage centres would need to be set up across the country.

Differing views across stakeholders:  While almost all players – OEMs, dealers, bankers, component manufactures and the government - agreed to there being a slowdown, differing views were presented on the root causes of the slowdown and ways to tackle them.

• Liquidity versus lending norms: While OEMs/ dealers sighted the tightening of lending norms for dealers/customers as one of the contributing factors for the slowdown, bankers seemed to believe that the tightening reflects rising NPA risks within the economy in general, and in the automobile sector in particular, as key reasons for the tighter lending norms. Bankers seemed to indicate that OEMs own financing subsidiaries could be an option to help improve liquidity. 
• Government intervention versus capitalism: The industry seemed to indicate that while measures taken by the government are welcome, however, faster/more comprehensive interventions could be needed. The government representatives indicated that measures in response to industry concerns had been taken and more actions are possible. However, business cycles (including the current downturn) are a sign of capitalism at work and the industry has enough depth/maturity to deal with these phases.  
• Retail versus wholesale: Unsurprisingly, dealers were sore with the high inventory levels and believed that focus on wholesale numbers caused inventory levels to rise. This could have been avoided, if retail volumes had been the focus. OEMs indicated that while inventories may have increased in certain segments, the same have reduced in other spaces. Further, given the seasonality in demand, forecasting is critical and hence, the mismatch in inventory levels. OEMs suggested dealers to focus on running a tighter ship, train staff and focus on technology to combat the downturn. 
• Investments versus profitability: OEMs emphasised the need for greater investments in R&D by auto ancillaries, particularly given the tremendous challenges before the industry. Auto ancillaries however highlighted issues with high variability in production (brought on partially by the high build-up in inventory) as one of the impediments to further investments. With pressures on profitability, the appetite to invest reduces significantly. 

Structural factors also to make an impact: Key factors such as mobility versus ownership, electric vehicles, changes in manufacturing techniques (industry 4.0) and a change in attitude towards car ownership (particularly among millennials), could lead to disruptions in the automobile industry over the medium term. These factors pose challenges, but may also lead to new sources of revenues. Further, the industry seems to have time to address atleast some of these challenges – e.g, even the most aggressive estimates predict that the ICE engine will continue to comprise 80% of total car sales by 2030.

On the whole, we expect near-term challenges for the industry to persist. Hopefully, as and when the industry does come out of the slump, all stakeholders will be in better placed (leaner/fitter) to meet future challenges. In the current scenario, we would prefer companies with long term competitive advantages namely Maruti Suzuki (strong competitive advantages) and Eicher Motors (strong brand equity).