The automobile industry’s fortunes through the year follow not one straight line marking a steady upswing in sales or a gradual decline in numbers. Instead, the chart plotting monthly sales could well look like a series of plateaued peaks and troughs — somewhat like a car's torque curve which we motoring journos like to obsess over.
There are seasonal peak months and seasonal low-volume months. There are positive influencers, like the festive season, leading to a jump in sales, tax and depreciation benefits, which drive the rush at the showrooms and then there are negative influencers, as in the summer months when buyers are just too busy doing other stuff, and months like December, when people just decide to postpone purchases so that they can register the car in the new year.
That is one of the reasons why passenger car manufacturers in India, almost unanimously, announce a round of price increases across models timed to take effect from January of the next year. And the standard fallback reason given by the auto industry for the price hike is an increase in raw material costs — a bit like the vague, apparently unquestionable reason offered by the airline industry when they announce that the flight's delay was caused by the late arrival of the incoming aircraft. But, by making that announcement in December, car makers ensure that it serves as a warning and pre-empts buyers from making the purchase in an otherwise lacklustre month. Surely, the pinch from the increase in raw material costs must hurt at other times of the year too!
Note ban-ged
However, during November and December last year there was one more factor at play which put paid to car-makers’ plans for compensating the seasonal decline in volumes. PM Narendra Modi's sudden announcement of currency demonetisation and the cash crunch that followed it hit small businesses and the ‘aam-aadmi’ equally hard. Naturally, car sales were no exception and there was a clear decline in numbers during December.
Car makers and industry analysts have quickly attributed the fall in sales to the debilitating effect of the note ban. Obviously, the negative growth was more than the expected slowdown in December. But how much of that fall is directly attributable to demonetisation? Is the loss in volumes not going to be compensated during the rest of the fiscal? And was the decline in numbers across the board for all brands? The details hidden within the numbers throw up some interesting trends.
Rural demand
First, when one looks at the variations in specific categories within the automobile industry, what stands out is that the tractor segment has actually registered a growth in numbers. On the contrary, the two-wheelers category has seen a decline in sales volumes. Interestingly, though, the mopeds category of two-wheelers has seen an increase in sales during December.
Now, one of the assumptions (which also plays out regularly in the real world) we make is the influence of any negative news on rural demand for automobiles. So, it is often said that just the news of the possibility of the El Nino system taking effect during the year and affecting the monsoons is enough for the farmer to postpone two decisions — one is a marriage in the family and the other is new tractor buys.
Sales of both tractors and mopeds are largely driven by rural demand and their numbers rising is a contrarian trend for all those claiming that demonetisation brought the auto industry to its knees. The key point here is that, except for some pockets of low rainfall, the monsoon has largely been good around the country. It is entirely possible that these buyers chose to fully finance these buys and weren't too affected by the lack of liquidity on hand.
Slide in car sales
But that, apparently, wasn’t enough to stop the slide in car sales. Though less impacted by demonetisation than two-wheelers, passenger vehicle sales also recorded a fall. Here too there were variations in the sales trends with a clear preference among buyers for new vehicle launches. And this wasn’t restricted to cars in any specific sub-segment.
The mixed trend in passenger vehicle sales during December last year gets more interesting when you look at the performance of specific categories. While the monthly year-on-year passenger car (hatches and sedans) sales fell by 8.14 per cent, sales of utility vehicles actually went up by 30 per cent. That’s huge. And it is also a reflection of the increasing popularity of SUVs among car buyers. Also, guess what, growth in sales of UVs during December was very close the year-on-year cumulative sales growth from April to December (33 per cent), which means demonetisation apparently didn’t stop the UV buyer.
Delayed gratification?
The biggest fall in sales was recorded by motorcycles — a near 22 per cent crash in volumes. Here too, there are brands which stand out with their contrasting jump in sales during December last year. For example, Royal Enfield, which posted a 40 per cent jump in sales of its bikes during the month, and Piaggio Vehicles, which more than doubled the sales of its scooters. Even if one were to factor in the newness quotient to these numbers, it is obvious that the lifestyle and aspirational attributes of these brands' two-wheelers have contributed to a sustained rise in their sales numbers,
In the light of these variations, the auto industry's decline in volumes doesn't seem too alarming. Yes, the fiscal year could end with single-digit growth for the industry overall. It is also possible that some amount of catching up might help it break into the double digits, especially if the Union Budget turns out to be pro-middle class, and with the easing of cash withdrawal restrictions.
As yet, more than 70 per cent of all passenger car purchases are financed through loans or through lease financing. So, technically, demonetisation should not affect car sales, though a cash crunch could temporarily apply the brakes.
There is a much greater likelihood of the note-ban, and the liquidity crunch later, to have spooked new car buyers into postponing their purchase decisions. With the car buy decision still mostly being taken by the head of the family, the call is often put on hold when any uncertainty pops up.
Will the pent up demand of the last two months show a spike in sales during the remaining weeks of this fiscal? Will the Modi Government line up any sops to compensate the middle-class and prod them to head to the showrooms again? The Budget will hold some answers.