23 September 2022 • 19 min read
The Automobile Industry Drives India’s Economy
The automobile industry in India accounts for 12 percent of the Gross Value Added (GVA) in the manufacturing sector. Recognized as a core sector, the auto industry contributes 49 percent to India’s manufacturing GDP, 7.5 percent to the GDP at large, and is responsible for 32 million jobs.
However, this $100 billion industry faces headwinds of chip shortage, overbooking, rural distress, fuel price-led inflation, and skyrocketing commodity prices. Read on to know more.
The Indian automobile industry is an inspiring success story. In the past four decades, it emerged as a shining light to catalyze India’s Gross Domestic Product (GDP) and the whole economy.
The global management consulting firm McKinsey, termed the automobile industry as one of India’s core sectors, estimating the manufacture of transport equipment to be worth up to 12 percent of the Gross Value Added (GVA) in the manufacturing sector.
As one of the leading driving forces of the economy, the auto industry contributes to about 49 percent to India’s manufacturing GDP and 7.5 percent to the GDP at large. The auto realm’s value chain is responsible for 32 million jobs.
Interestingly, the Indian automobile market overtook Germany, Europe’s largest economy and export powerhouse, to emerge as the world’s fourth largest in 2018, valued at nearly $100 billion.
The industry, estimated to account for 65 million jobs by 2026, has gone through many disruptions that began around the outbreak of the Coronavirus pandemic. Chip shortage, multiple and duplicate bookings, rural distress, fuel price-led inflation, a steep hike in commodity prices, container shortage, and surging logistics costs, are some of the challenges disrupting the Indian automobile industry.
Drop in Sales
Domestic automobile sales dropped to the lowest level in India in nine years to 17.51 million in 2021 – 22. Earlier, the low was reached in 2012 – 13 when total wholesale fell to 17.82 million, according to the Society of Indian Automobile Manufacturers (SIAM).
Two-wheeler sales took the biggest hit, falling to the lowest rate in a decade in 2021 – 22 to log 13.4 million units. The last time sales were so low was back in 2011 – 2012 when the sales were at the same rate. Within two years of unlocking the all-time highest two-wheeler sales of 21 million units in FY19, the numbers tumbled to the low registered in 2021 – 22.
Even decent sales of electric two-wheelers (300,000), could not offset the lows touched in the overall two-wheeler sales. Similar was the case with internal combustion engine (ICE) powered three-wheeler sales, which logged only 260,000 units, almost 50 percent lower than the highest sales volumes.
Exports show an optimistic outlook
Despite the depressing domestic performance of the automobile industry, pockets of exports have extended some optimism in the outlook. Passenger vehicle exports logged the highest numbers in eight years, 576,000 since 2013 – 14, rising from 440,000 units in FY21. India achieved its highest passenger vehicle exports of 596,000 units in 2013 – 14.
Meanwhile, two-wheelers' exports put up a better show, logging exports of 4.4 million units, translating into the highest ever growth in exports.
Under-utilization of capacity
In 2021 – 22, India had an installed automobile production capacity of nearly 35.5 million units but only 22.9 million automobiles were manufactured. Though the 7 million units production capacity belonged to passenger vehicles, only 3.6 million were made.
Including commercial vehicles, four-wheelers manufacturing capacity utilization was estimated to be 63.64 percent, whereas for two and three-wheelers it was around 61 percent.
Unused manufacturing capacity aggravates layoffs, a drop in job creation potential and investment, and eventually affects the economy.
In the past five years, as many as five manufacturers—UM Motorcycles, MAN Trucks, Harley Davidson, and Ford—quit production in the South Asian country, indicating that some challenges are being faced in the Indian economy.
CRISIL Director Hemal Thakker notes the income of people in the upper and upper middle-end of the income pyramid is now higher than two years ago, which is to have little effect on all car segments, except entry-level cars in 2022 – 23.
Vinkesh Gulati, president of the Federation of Automobile Dealers Association (FADA), hopes that FY23 will be better than the previous fiscal, owing to normal monsoon forecasts which could give rise to normal crop production.
Considering that most people are now vaccinated against COVID, their immunity is expected to be better. Thereby more money is saved from healthcare expenses to fund the purchase of two-wheelers, cars, tractors, and other automobiles.
After the Coronavirus outbreak, supply chains to the automotive industry have been disrupted. Irregular automobile production and quicker than anticipated recovery in some markets, has emerged as a crisis.
In addition to the demand from the auto industry for chips, whose production is interlinked to several geographies for components, work from home driven demand for computers, cell phones, and other electronic gadgets amid the Coronavirus pandemic outstripped chip supplies.
According to Maruti Suzuki’s Chief Executive and Managing Director, Hisashi Takeuchi, the chip shortage will continue, but he outlined that the circumstances could fare better than last year.
Kavan Mukhtiyar, Partner and Leader, PriceWaterHouseCoopers India (PWC) observed that the paucity of semiconductors and other supply chain hiccups are actually impeding higher growth. Mukhtiyar feared that this crisis could prolong for nearly a year more.
At the same time, Russia and Ukraine, neighboring countries that were known to play a key role in chip supply chains globally, are currently in a state of war, further disrupting semiconductor supply chains.
The stringent Chinese zero-Covid strategy has shut down important manufacturing hubs crucial for global supply chains.
According to Srivastava, Maruti Suzuki did not have visibility on chip supplies for over a few weeks, by the end of April.
Chips shortage results in fewer features
As many modern automobile features require chips, it is feared that Indian car manufacturers may emulate their international peers in cutting some fancy features, in light of the chip shortage.
Indian car companies have been compelled to prune production and raise prices. This resulted in orders getting delayed and raised the focus on car models needing fewer chips.
Akin to American automaker General Motors (GM) doing away with heated seats, a top feature in colder climate countries, due to a semiconductor shortage, Indian companies may take a leaf out of GM’s book by obviating features such as voice-assist, an in-built internet connection, and the 360-degree camera.
Chips shortage amid thousands of pending orders
By the end of April 2022, amid chip scarcity, Indian car makers were staring at a pending orders pile of up to 750,000. This was India’s largest-ever figure of pending car orders with Maruti Suzuki alone counting nearly half of the orders.
Affected by the shortage and delays, all compressed natural gas (CNG) powered models from the 40-year-old manufacturer have a waiting period stretching up to nearly six months of time, especially the CNG Ertiga model.
Mahindra & Mahindra (M&M) and Tata Motors together were sitting on pending orders piles of up to 375,000 even as car models such as Hyundai Creta, Tata Nexon, Punch, Thar, and Mahindra XUV 700 also are high in demand. India’s top four car manufacturers, Maruti Suzuki, Hyundai, M&M and Tata Motors, account for 80 percent of the passenger vehicle market.
Meanwhile, Carens and Slavia, new models from Kia and Skoda have a waiting period of up to six months and three months respectively.
However, car makers believe that the ballooned order pile may not truly represent the actual demand for vehicles as many car buyers are making multiple bookings.
Shashank Srivastava, Senior Executive Director for Marketing and Sales, Maruti Suzuki noted that buyers are not only booking cars with multiple dealers for a single product but are also booking vehicles from other brands, with the plan to go for the model which gets delivered first. Srivastava highlighted that a single buyer going for multiple bookings has also raised the number of cancellations across the industry.
Besides the phenomena of overbooking and cancellations, dealerships have also seen a dip in enquiries due to lengthy waiting periods.
Though demand emanated majorly from rural areas during Coronavirus first wave, the second wave did not spare it. Gulati noted that unemployment and inflation, are two big worries and the fortunes of rural demand depend on spending, even as the government is raising expenditure on infrastructure with high budgets. This is important to uplift the sentiment of rural consumers.
Unfortunately, farmers’ income in India did not rise to expected levels. Though tractor sales were doing fine for a good amount of time during the pandemic, they started to plummet in August 2021.
Barring a flat October, tractor sales declined by double digits for seven months, a development which points at economic challenges. Tractor sales in India fell by 17 percent in August, 15 percent in September, were flat in October, 22.5 percent in November and 23 percent in December.
Analysts point that the decade-low demand for two-wheelers and declining tractor sales are a sign of difficult economic conditions for India. Significantly, utility vehicles surpassed cars in attracting demand for the first time, including entry-level cars, sought after in rural areas.
The share of rural purchases in passenger car sales declined to 38 percent in Q4, FY22 from 41 percent in Q1 FY21, considering the strain on rural incomes and swelling inflation, which hurts the ability to spend money on discretionary items.
The rural economy continues to be battered as the demand for minimum wages is rising consistently at a time when the monetary allocation for Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) has been slashed to INR 7.3 million in FY23 from INR 11.1 million, a year ago.
Meanwhile, the two-wheeler segment is expected to face some headwinds as On-Board Diagnostics II (OBD II) is scheduled to be implemented from the beginning of the next fiscal year, which will add to the cost of the vehicle.
CRISIL research highlighted that OBD II will hike two-wheelers prices up to 6 to 7 percent plus whatever price increases companies will bring into effect, for various reasons such as rising commodities prices, geopolitics, and others.
Inflation due to skyrocketing fuel prices
More than a decade ago, India transitioned into the difficult era of unregulated fuel prices, from the regulated fuel prices regime. Back then, there were no daily hikes in fuel prices. Unlike the international practice, petrol and diesel prices were raised only when the government allowed the oil marketing companies to do so.
Following deregulation, and later syncing of fuel prices to international crude prices in 2016, Indians started witnessing daily price hikes of petrol and diesel, which was unheard of for them, a few years ago.
As India’s federal government started raising fuel prices frequently, petrol and diesel prices touched INR 100 for the first time in June 2021 and continue to hover over this unexpected mark.
Between 2014 – 15 and April – January 2021, the Government of India’s tax collection on petrol, diesel, and natural gas shot up by nearly 300 percent.
Fuel prices in India has the effect of cascading inflation onto everything from freight prices, to fruits and vegetable prices. Due to dearer petrol, diesel, and cooking gas prices, consumer food prices went up by 100 percent between March 2021 and March 2022.
In the near future, fuel prices in India will continue to be vulnerable, as the Russia – Ukraine war shows no sign of ending. The risk to inflation due to fuel prices will continue.
Dearer commodity prices
As raw materials comprise the lion’s share of the cost for car makers, ranging up to nearly 78 percent, any increase in their cost is directly proportional to the final price of the car.
Mainly due to the Russia – Ukraine war, prices of commodities like platinum, rhodium, copper, aluminum, steel, and plastics have been high for two years.
The price of nickel rose by 219 percent, aluminum (136 percent), zinc (108 percent), copper (101 percent), HR Steel (91 percent), and CR steel (77 percent), between April 2020 and March 2022.
Even the precious metals used in automotive electronics have seen an upward price trend.