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Indian auto sector has made all the right moves in this fiscal and must maintain the momentum

Contributed by Nirmal Bang

By Nirmal Bang

Traditionally, Id and Diwali festivals augur a positive period for the auto industry in India, as buyer sentiments tend to go up amid the pomp and joy of the season. Fiscal year 2009 was a dismal exception, as automakers struggled between October and December 2008. This is all the more reason to look at the current monthly and quarterly growth rates with a pinch of salt. The Q3 results for FY10 are likely to look spectacular, though they are marked improvements from the January-April 2009.

Take Ford Motor, for instance. This September, Ford India announced an impressive 50% year-on-year (y-o-y) sales growth in Sept ’09. It sold 3,405 units as against 2,273 units in Sept ’08. Without taking anything away from the American car maker, the growth in September over the same month in 2008 is not as staggering as the 50% y-o-y rate suggests. Ford continues to have a less than 2% market share in the Indian car market.

But what is truly more heartening for Ford is that its recovery and ascent in India is now well and truly on. This is visible in its 38% month-on-month increase over Aug ’09. On a quarterly basis, it clocked a 24% rise over the same period in 2008. Now the real battle begins as it has launched its small-car called Ford Figo that will be up against top dogs Maruti Suzuki and Hyundai.

Figo promises to usher in volumes for Ford. Priced Rs 3.5 lakh upwards, it is now likely to evince the interest of small car-buyers who form a majority in the Indian market. While this may be seen as a late foray into the volumes segment, the industry is also looking at the post-2010 period as the second wave for the Indian auto sector. So, Ford is among the first of a string of car makers waiting to launch their small cars. Toyota, General Motors and Volkswagen will also be in the small car market by end-2010.

The bottom line is that carmakers are back in business after the worrying fourth quarter in FY09. That period was up against the aftermath of the global recession, which made buyers cautious and manufacturers anxious. Inventory thus piled up over the third quarter of FY09.

The government must be credited with lifting the industry from that plight with its stimulus measures that combined tax cuts and easier credit terms. This included excise duty sops, reduction in service tax and bank lending rates, which helped auto companies to limit job losses and stage a recovery in March. The sector directly and indirectly contributes to 10.5 million jobs, according to the latest Economic Survey.

In mid-October, PM Manmohan Singh signalled that the stimulus package would be intact for some more months. This somewhat eases the pressure for a number of Indian auto OEMs, particularly those that manufacture trucks and buses like Ashok Leyland and Tata Motors. Though government projects are gathering steam slowly but steadily and the real estate sector is beginning to stabilize, it could be a while before the sales reflect the turnaround. The onus is on car manufacturing.

Post Slowdown Cues

The Indian car market has been led by incumbent Suzuki. In the first quarter of fiscal 2010 itself, it contributed a staggering 47% of cars sold even before the recovery had kicked in.

Not surprisingly, by August when the revival was truly visible in the market and the consumption rose, every car maker had a vehicle ready for launch. This is evident in the July-September quarter. Prior to Ford Figo, Honda Siel Cars India released its compact car, Jazz. General Motors launched its premium sedan Cruze. Tata Motors has launched a variant of Indigo: the next generation Manza. The delivery of Nano, its ultra-small car, is on track. Maruti Suzuki too has managed a spate of releases across market segments, while Toyota launched the premium sports-utility vehicle called Fortuner. Fiat has managed two launches in what looked to be a recession year: the mid-sedan Linea and compact car Punto.

It looks like a return to the old Diwali-Id order, as manufacturers have regained confidence to launch a spate of car models. But none of this could have been possible without the stimulus package that the government has maintained since January this year.

That said, the industry has examined myriad elements of its cost structure. The Mahindra Group for instance, began the year with the launch of a value-for-money utility vehicle called Xylo. It thus managed to give Toyota Innova a run for its money because of the price factor (almost Rs 2 lakh less). Much of the good work had been done on the cost front and able distribution helped it spur its own revival story. In Sept ’09, it clocked domestic auto sales of 27,431 units as against 24,481 units in Sept ’08 (an increase of 12.1%). It is readying to launch the Scorpio in the US by Jan ’10.

Its nine-month domestic sales were 1,32,522 units in Sept ’09, as against 1,16,971 units for the same period last year. The 13% increase is impressive as it signifies stable volumes in both the 2008 pre-slowdown period and the post-slowdown period in 2010. On the BSE, its scrip has risen from a low of Rs 235.50 in Dec ’08 to Rs 981 in mid-Oct ’09, even as the BSE Auto Index gained over 170% so far this year.

The two things automakers are doing well to remember from the slowdown months are to continue monitoring costs while leveraging the Diwali season to sell premium vehicles and to focus on topline growth and customer satisfaction. This will have a positive impact on OEMs’ profitability. This will be particularly significant because automakers had to give special offers to promote sales earlier this year. “Across the board, our people have entered a cost-reduction loop through simplifications. We call it ‘value-analysis and value-engineering’,” said Satish Sekhri, Managing Director of Bosch Chassis Systems. Suppliers to commercial vehicle manufacturers are yet to recover from the market decline of last year. Tier-I suppliers to light truck and car manufacturers have recovered though.

The bent towards customer satisfaction has been visible in the past five months. For instance, General Motors is promising three years of free vehicle servicing with every purchase of a Chevrolet car. More recently, Fiat India launched a customer care programme called ‘Fiat First’. Under the plan, it will offer roadside assistance and warranty coverage. Both OEMs are not content with topline growth, but want to complement it with aftersales service. The market now seems to be revving up for the second wave.

The auto story of the past quarter, however, continues to be high growth. In the two-wheeler market, Bajaj Auto reported its highest ever turnover at Rs 2,909 crore (14% increase) and net profit of Rs 403 crore, which more than doubled. This came on the back of 8% overall increase in sale of Baja Auto vehicles (two-wheelers, three-wheelers and motorcycles).

It has been the tale of the Indian summer, with lessons not to be forgotten. The year 2010 promises also to be a competitive one on all fronts, especially after the Diwali euphoria recedes. With 2010 set to be the year of the Commonwealth Games and the government promising to speed up infrastructure projects, the commercial vehicles industry will get a much-needed boost. The two-wheeler segment will capitalize on newer opportunities in the rural markets. The automobile sector has made all the right moves in the first two quarters of fiscal year 2010. It must now maintain the momentum as it heads towards the new year.