Demonetisation may have a bigger adverse effect on the automobile sector, than what had initially been anticipated, as retail sales continue to stay down by as much as 70 percent across some segments, forcing car makers and dealers to dole out massive discounts to boost sales.
Dealerships are likely to end 2016 with the highest ever inventory levels, despite automobile manufacturers looking to take a two-week production nap in December – against the usual practice of a week – said officials from the Federation of Automobile Dealers Associations (FADA).
Vehicle purchases have taken a backseat since 9 November, after the government demonetised Rs 500 and Rs 1,000 currency notes.
Motorcycle and scooter dealers had, in November, told BloombergQuint that sales had fallen by as much as 90 percent and that even walk-in enquiries had dried up. However, it was expected that the impact would be a short-term one and that sales would bounce back soon.
The scenario appears to be a lot more serious in the second week of December. “The impact of this (demonetisation) has been severe… at least the next three-six months are likely to be down,” said John K Paul, President, FADA.
Inventory Levels
Dealers across the country, barring those of a very few manufacturers, are staring at a huge number of vehicles remaining parked at their warehouses.
Among passenger car manufacturers, Hyundai Motor India Ltd and its dealers have been hit the worst. Hyundai dealers currently have an average inventory level of anywhere between 80 and 90 days, a senior official at FADA said. The reason for Hyundai having a particularly high inventory is the bouquet of launches it has had over the past year, forcing dealers to keep stock of all models, despite some of them not doing as well.
On the contrary, market leader Maruti Suzuki India Ltd happens to be the least affected by the cash situation, for most of its vehicles command a waiting period, and the booking amount for these vehicles have already been paid by respective buyers.
“After the launch of the Baleno (hatchback), and Vitara Brezza (compact SUV), and the high demand for these vehicles, Maruti Suzuki cut down production of other cars to accommodate demand for the new launches. So, there came a scenario where Swift and Wagon R were also pushed into the list of vehicles with a waiting period. This situation has helped Maruti now, because most vehicles command a waiting period, and sales of those are less impacted,” a FADA official explained.
The average dealer inventory level for Maruti Suzuki currently stands at 30-35 days, the official said.
The number is similar for Tata Motors Ltd as well, given the waiting period its recently-launched hatchback Tiago commands. Dealers of Tata Motors’ vehicles also hold an average inventory of 30-35 days.
Mahindra & Mahindra Ltd, which palpably lost some ground in terms of its November wholesale figures, seems to have slowed production. M&M dealers currently hold inventory for around 40 days, the official said, which is higher than its immediate peers due to its higher exposure to rural markets.
The two-wheeler segment, which has been hit more due to an even higher exposure to rural markets, seems to be grappling with severe inventory-related problems.
Market leader Hero MotoCorp Ltd, currently sees its dealers holding inventory of anywhere between 10 and 12 weeks. The second-placed Honda Motorcycle and Scooter India Pvt. Ltd (HMSI) doesn’t seem to have it any better. HMSI dealers have an average inventory of 8-10 weeks currently. Pune-based Bajaj Auto Ltd, has it slightly better, but that is largely due to lower total volumes, the FADA official explained. Bajaj Auto dealers have an average inventory of 6-8 weeks, a notch higher than those of TVS Motor Company Ltd’s dealers, for whom the number stands at 5-7 weeks.
Discounts
December is typically a lean month for automakers as the typical buyer shies away, wanting to wait a few days to get a vehicle manufactured in the new year. Add to it the current scenario, where vehicle purchase doesn’t figure high on the priority list of most, and manufacturers and dealers seem to be trying their best by offering a plethora of goodies with every purchase booked.
Maruti Suzuki is currently offering discounts of up to Rs 80,000 on its products, ranging from Rs 55,000 for its entry-level hatchback, Alto 800, to the aforementioned amount for the multi-utility vehicle, Ertiga.
“Despite the high level of discounts we are offering, the number of fresh bookings have fallen sharply. Most of the deliveries we are making now, are from bookings made in September and October, which was before this (demonetisation) happened,” a proprietor of a Maruti Suzuki dealership said, requesting anonymity.
Hyundai Motor has discounts going up to Rs 2,00,000 for its premium SUV Santa Fe, and starting at Rs 35,000 for the high-selling Elite i20 hatchback.
Given the cash crunch, almost all automakers have offered a ‘zero down payment’ scheme, with some even deferring payment of the equated monthly installments (EMIs) by as much as a year.
Luxury car manufacturers are the worst hit among passenger car makers, and a look at the discounts being offered there is proof enough.
German giant Audi AG’s Indian arm has discounts going all the way up to Rs 8,75,000 for its high-selling A4 luxury sedan, and is offering discounts of at least Rs 3,00,000 on all models, barring the recently-launched Q7 premium SUV. The Q7 also isn’t being offered at the sticker price, as is common with new launches, but has a discount of Rs 2,60,000.
Fellow German rival BMW has doled out goodies such as zero down payment, EMIs deferred by three months, and other offers including extended warranty and complimentary insurance for the first year.
What Lies Ahead?
Most experts BloombergQuint has interacted with over the past month, have said in almost unison that the effects of the current cash crunch are likely to last till at least the end of March, with some saying that things could remain low even beyond that period.
“If things go on like this for a while, we could be staring at lay-offs by most manufacturers. Temporary labour is likely to face the axe. It is likely that some lay-offs may have already happened at some plants, but given the current scenario, the number is likely to rise,” said an analyst.
The lay-offs are likely to extend to the dealer network as well, said Nikunj Sanghi, Director of International Affairs and past President, FADA. “We can take the hit for a couple of months, but after that there will be no option but to cut workforce. The number of sales representatives at a dealership is based on the number of units sold,” Sanghi said.
The automobile industry, which was just beginning to recover from its largest ever slowdown, from 2012 through 2015, is staring at yet another period of lull.
The Society of Indian Automobile Manufacturers (SIAM) has also gone on record to attribute the sudden fall in vehicle sales in November to demonetisation and the resulting cash crunch. While the SIAM didn’t make a downward revision to its sales forecast for the year, Director General Vishnu Mathur did say that the impact was expected to last for a while.
(Originally published in Bloomberg Quint)
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