Tough ride for auto cos on labour strikes, rate hikes

The tide turned against car and bus makers in 2011 as sales dipped and fuel prices and interest rates soared. India’s claim as an export hub was dealt a blow and Suzuki, the owners of India’s largest-selling cars Maruti Suzuki, got a taste of Indian labour laws when strikes hit production.

“The year has been a difficult one for the industry,” says RC Bhargava, chairman, Maruti Suzuki India. “We expect the outlook for the next year to become clearer after the Budget.”

Car sales declined in October to their lowest in 11 years: buyers postponed purchases due to higher EMIs as interest rates rose; car maintenance costs went up as the government hiked petrol prices and companies had to pay more to import parts with rupee falling 18%.”Rising ownership costs, led by high interest rates, rising fuel and vehicle prices have made 2011-12 the worst year in a decade for the industry, especially the cars and UVs segment,” said Sridhar Chandrashekar, head, Crisil Research. The Society of Indian Automobile Manufacturers (Siam) lowered its growth forecast twice for 2011-12.

Analysts say the auto industry has grown less than 8% in CY 2011 to date, less than one-third of the 30% growth in 2010. “After the robust 30.8% increase in sales in 2010, growth in the domestic automobile sales volumes had slackened to a mere 4.6% in 2011 (Jan-Nov),” said Arun Singh, senior economist, Dun & Bradstreet India.

Automobile makers are now producing units according to the demand to lower inventory costs. According to the Siam report released on December 8, the passenger car production was up just 0.76% at 15.73 lakh units during April-November 2011-12 over the same period last year.

Some ventures broke off. Hero Group, India’s largest-selling motorbike maker, parted ways with its Japanese partner, Honda Motor, to build its business on its own. Partners will now turn rivals as the break-up allowed Hero to sell its products across the globe and Honda to push more bikes in India. Germany’s Man Truck and Bus and Pune-based Force Motors called off their venture amicably.

“The break-up of partnerships spoke of foreign companies’ intent to establish a firm base on their own,” said Chandresh Ruparel, MD, Rothschild (India). “One will see a lot more features offered at competitive prices by foreign players in the times to come.”

Buyers switched from petrol to diesel-driven products as oil marketers hiked prices by around 18% during the year. “Sales of petrol-fuelled cars declined by 11%, while diesel cars rose 22% during the first half of FY11,” said Subrata Ray, senior group vice-president at credit rating agency Icra.

Car makers pushed more diesel cars into the market with competitive prices. Maruti launched Swift diesel, Chevrolet Beat and Toyota, Etios and Etios Liva.

Two-wheeeler makers maintained their growth with a slew of fresh models, but an impending slowdown has forced them to push more units overseas.

Hero MotoCorp and Bajaj Auto are eyeing overseas markets like Africa and Latin America for their products. While Bajaj Auto has an early-mover advantage in these markets — it started assembly line in September in Tanzania, and plans to sell bikes in Brazil — its rival Hero MotoCorp is expected to market its largest-selling Indian bike, Splendor, in these markets by mid-2012. According to Singh from Dun & Bradstreet India, “Two-wheeler makers would push exports to emerging markets, including Brazil, Africa, Argentina and Indonesia.”

Moreover, the year saw two-wheeler maker TVS Motor shift two-thirds of its export production to China from its Chennai plant. In 2010, Hyundai Motor India, too, had shifted production of its premium hatchback i20 to Turkey from its plant in Chennai. The reasons were rigid labour laws and withdrawal of key export benefits, say experts.

“While sluggish GDP growth will affect commercial vehicle sales, a high base and saturated urban markets will impact two-wheeler sales growth,” said Crisil’s Chandrashekar.

Buyers will have to pay more as companies hiked vehicle prices after a falling rupee made imports costlier. Maruti Suzuki India, Honda Siel Cars and Toyota Kirloskar Motor hiked prices anywhere between 2% and 5%.

Prospects for 2012 are getting bleaker as a slowing economy may hit domestic sales and euro zone crisis affects exports. “Any adverse macro-economic development, either domestically or globally, can bring down economic activity and adversely impact both passenger and commercial vehicle demand,” says Icra’s Ray. Automakers heaved a sigh of relief as RBI paused on its interest rate-hike spree in December. “A benign interest rate environment is expected to bring in some relief next year to the industry,” he added.

But India’s largest auto companies have challenges from global rivals. Tata Motors and Mahindra & Mahindra will face new challenges in 2012 to guard market share as mutlinational companies launch products with newer and better technologies at affordable prices. Multinational companies have cornered roughly 70% of small car market and multinational truck and bus makers are queuing up to make fresh investments in India.

“Next year, one will see a lot of better products with better technology offered by the companies,” says Maruti Suzuki’s Bhargava. Maruti will have to act fast as new foreign car markers line up to sell small cars.

These players have not just given up, though. They are hiking their R&D spend and developing products for global market. M&M has just developed its XUV 5OO to sell in Australia and Africa and Tata Motors have started selling its iconic JLR in India. Tata Motors turned around the JLR, driven by its marque brands, reporting better than expected consolidated net profit at R9,273.62 crore for the fiscal ended March 31, 2011, but is finding tough to make its dream car Nano a success. In 2011, the Nano sales, after touching 10,000 units in April, saw a steep fall to 6,401 units in November.

Analysts see rising fuel prices, initial issues with the model and the huge choice made available in the market as reasons for the fall in Nano’s charisma. The company has made a few changes in the look and feel of the car called Nano 2012.

Growth in the CV market, too, saw signs of slowdown. The sales of medium and heavy commercial vehicles (M&HCV), led by sluggish bus sales, slowed due to the rise in interest rates in the first part of the year, while lowered industrial growth weighed in the second half.

The GDP slowdown is an indicator in the decelerating growth in the CV market, R Shridhar, MD, Shriram Transport Finance, the largest financier of second-hand trucks. said. Icra expects M&HCV demand to slowdown for the remaining quarters of this financial year with an estimated growth in the segment of 3-4%.

The truck market will get crowded as Daimler India Commercial Vehicles’ Bharat Benz trucks, PSA Peugeot Citroën, Renault, and China-based Beiqi Foton Motor roll out their products.