Autos: Winter has come!

Automobile sales have declined by 44 percent in the five months ending FY20 compared to last year which wasn’t the best year for autos to begin with. Demand was found wanting in the commercial vehicles and tractor segments, while passenger cars were also barely growing, the signs of lethargy finally setting in after much resilience. Since then, consumers have stepped back dramatically.

There are a number of factors. Auto assemblers have been raising prices—which they believe barely cover the higher input cost they are incurring due to rupee devaluation. Since they still depend on imported CKD kits to assemble units, especially for newer models, price increases were inevitable for them. Auto parts manufacturers also import some commodities (such as steel) and other parts which may have also been affected by the devaluation. These have been passed on to the consumers. On the firms side, this means margin maintenance but on the consumer side, this is an added premium they don’t have the capability of paying.

When the economy is booming and incomes are rising, consumers have paid hefty premiums to car dealers to get their already expensive cars on time. Automakers were working on over utilized capacity and demand was far in excess of supply. But then comes economic slowdown, taxes are raised, prices of most necessary goods are much higher, and purchasing power depletes. On top of that, when automakers raised prices half a dozen times in a matter of a year, these cars just became too unaffordable.

Also consider that there are plenty of new cars that will soon be introduced into the market. Perhaps some affluent customers are waiting for the new pickings, delaying their buying decision for a later time. Over the past year, mid-range cars like Wagon-R and Cultus were highly in demand because of their high usability in the gig economy. Uber and Careem were fueling sales in the segment. That demand has also visibly faded away. The aforementioned factors are definitely one reason. Another reason is the higher cost of borrowing.

Since many of these cars were brought on bank financing, higher interest rates became a hanging sword. Bank borrowing is simply too expensive, and too unpredictable at floating rates for car buyers to go for it. That is another reason for demand quickly drying up.

Right now, auto assemblers are observing several non-production days (NBDs) because inventories are piling up, but customers are no longer coming by. But they better tighten their belts even further because even as the economy comes out of its latest crisis, the government’s electric vehicle policy is about to change the game completely. As new and old players fight for a share in the market pie, many EVs will be imported into the market. If they pique consumers’ interest—though they will not be cheap—that’s another thing that companies will have to worry about, and hopefully plan for.