The Indian automobile industry witnessed subdued sales during November and December 2018 due to the slowdown in NBFC’s loan disbursal and certain other issues. If the trend persists, that could be one more setback for an industry already bracing itself to meet the BS-VI norms from April 2020. This is over and above the potential disruption that may be caused by electric vehicles and changing customers’ preferences. These factors, together, pose substantial uncertainty, especially in the passenger vehicle space, even though the industry has been performing reasonably in recent years.
The automobile sector is classified into the following segments: 2/3-wheelers, 4-wheelers (PVs), and commercial vehicles (CVs). As per SIAM (Society of Indian Automobile Manufacturers), sales during FY’18 stood at a little over 2 crore units for 2 wheelers, 33 lakh passenger vehicles, 8.6 lakh commercial vehicles, and 6.4 lakh 3-wheelers. Interestingly, all the four segments recorded sales growth in the range of 7–8% during FY’14–18. Other than domestic consumption, the industry is quite active in exports market also, especially in the 3-wheelers segment, where almost 40% of production is exported. The share of exports in PV segment is 20%.
Despite being clubbed together, each segment has its own unique dynamics and market drivers. While the rural income is a primary determinant for 2-wheelers’ sales, 4-wheelers are almost wholly dependent on urban disposable income. On the other hand, commercial vehicles are driven by aggregate economic activity, whereas 3-wheelers are driven by economic activity, increasing urbanization, and lately, entry of app-based aggregators, which are changing the dynamics of the market. The entry of these players and scrapping of the permit system for running 3-wheelers across major cities in Maharashtra and some other states in 2017 have given a major boost to this segment.
Even though the industry is dominated by a few large players, it is highly competitive in nature. So much so that even attempts by players from one segment to enter another have not been significantly successful. For instance, Tata Motors has been struggling in the passenger vehicle segment with less than 5% market share despite having 45% share in the commercial vehicle segment. The competitive nature of the industry is more evident in case of the passenger vehicle segment due to presence of a number of smaller players backed by global majors. In fact, the failure of these companies to create a position for themselves in the market could be an interesting case study.
While there could be a variety of factors, the most important one is not ceding the market by the market leader which has leveraged its first mover’s advantage beautifully. While many of them tried to crack the market through a JV with domestic players, it did not give them any real breakthrough; and a large number of these JVs were terminated. With increasingly more stringent regulatory norms, it would not be surprising if some of them exit the market, like in the case of the telecom sector.
A look at the financials shows that the total domestic sales of the industry were over INR 3.5 lakh crore in FY’18 with net profit of about INR 28,000 crore (this figure does not include JLR sales owned by Tata Motors). Sales show an impressive growth of 11% CAGR during FY’14–18. More importantly, profits have risen at an even better 19% CAGR.
However, as they say, one person’s profit is another person’s loss. Large part of this improved profitability is attributable to the decline in steel prices, as a result of sharp increase in imports from China. Raw material cost for the sector grew by barely 8.7%, leading to 5 percentage point decline in RM/sales ratio. While the operating margin for the sector is a modest 16.7%, due to low interest and depreciation (I&D) charges, just 5.4% of the sales helped it record a net profit margin of 7.5%. I&D charges for steel industry stands as high as 12.5%, and is 8.2% for the cement industry. Even though the segment does invest a good amount of money in product development, the capital investment required for actual production is somewhat low, leading to low I&D charges. Even though the third quarter is looking challenging, results for half year ending Sept’18 was even better than the previous years’ performance. While sales rose by 21%, profits recorded an even higher growth of 34%. The profit growth has been aided by the performance of Tata Motors, which moved from a loss of about INR 700 crore to profits of INR 1,300 crore this half year.
While the near-term growth of the industry looks reasonable, the passenger vehicle is staring at a significantly challenging future in the medium term. The biggest of these is the change in the very notion of 4-wheelers carrying aspirational value, and the consumer shifting from ownership to on-demand transportation. As per a report quoted in Tata Motors’ annual report, millennials in the Asia-Pacific region are 49% more likely to use shared mobility solutions. This, coupled with increasingly more stringent regulations, emphasis on stronger public transport system, etc., can change the industry structure in unimaginable ways; and it would be interesting to watch out for that!
Ashish Agrawal Founder,
India Business Analysis | IIT Roorkee, IIM-C alumnus