13 Apr 2019 20:17 IST

Explained: Slowdown in the auto industry

Companies have been forced to cut production due to weak demand

The domestic auto industry, which began 2018-19 on a high note, is staring at a crisis as the new fiscal begins. The industry ended 2018-19 with a subdued 5.15 per cent growth in overall sales volumes, steeply lower than the 14.22 per cent growth recorded in 2017-18. While the first half of 2018-19 did see good sales, the second half (October-March) was disappointing. The double-digit volume growth (year-on-year) in automobile sales, registered in the initial months, slowed to single digits towards mid-year and volumes dropped rapidly in each of the last four months.

The passenger segment, such as cars and bikes, has been the worst affected. In 2018-19, sales of passenger vehicles – which comprises of cars, utility vehicles and vans – grew by just 2.7 per cent. This is the slowest in the last five years. In the same period, two-wheeler sales – scooters, motorcycles and mopeds – grew just 4.8 per cent.

Companies have been forced to cut production due to the weak demand. Market leader Maruti Suzuki cut back production of passenger vehicles by 8-20 per cent in four of the last five months. With two-wheeler sales hitting a lower gear too, production of major players such as Hero MotoCorp and Honda also slid.

Reasons behind the fall

In 2017-18, vehicle sales did well, bouncing back from such setbacks as demonetisation and the GST implementation. However, the industry has run out of luck this time around. A host of factors has been responsible for the waning demand. Vehicle sales had a good run in the April-June 2018 quarter, thanks to the low base of the previous year due to the GST impact, but declined thereafter.

For one, rising fuel costs pinched pockets of consumers. Patchy monsoons and a crash in farm prices dented rural sales. Management notes from various companies indicate that rural demand growing at a faster rate than urban was instrumental in boosting car and two-wheeler sales until a few months ago. Higher insurance outgo due to an increase in premiums on third-party cover was a dampener too. The liquidity shortage among finance companies following the IL&FS crisis was the final blow. Vehicles are typically financed purchases.With customer credit lines drying up, dealers, who usually load up on inventory to meet demand during the festival season, were left with large unsold stock forcing companies to slash production.

But structural factors alone cannot be blamed for the slowdown. Crude oil prices, which touched a high of $86 a barrel in early October 2018, are at least 20 per cent lower now. A recent report by JP Morgan indicates that financing concerns have eased considerably, both for cars and two-wheelers. Yet, inventory build-up persists due to weak demand, and huge discounts seem to be the order of the day.

These trends point firmly to the cyclical nature of the industry. More so because, along with cars and two-wheelers, commercial vehicle sales too have weakened, although they still sport better volume growth than the passenger segment vehicles.

Given the weak demand, auto stocks were a battered lot the last year. The S&P BSE Auto Index lost 18 per cent in the last year, while individual stocks such as Hero Moto Corp or Ashok Leyland have dropped by a sharper 24-34 per cent.


Though, the borrowing costs are going down, uncertainties due to the elections, and the drying up of private investments and government spending imply that this fiscal too will begin on a sober note. Besides, the forecast of a weak monsoon in 2019 does not augur well for vehicle sales. The second half of 2019-20 may witness an improvement in sales due to pre-buying of cheaper BS IV vehicles before the compulsory sale of BS VI vehicles begins on April 1, 2020.

Overall, the Society of Indian Automobile Manufacturers forecasts that the passenger vehicle sales volumes will grow by 3-5 per cent in 2019-20, while two-wheeler sales are expected to grow by 5-7 per cent. Meanwhile, commercial vehicle and three-wheeler sales are expected to grow by 7-12 per cent. So, it may be a while before the sector is back in fourth gear.