Has the Indian auto market lost its shine?

Car sales declined 7% in 2012 and are so far dropping even more in 2013. Can easing policies induce sales?

By AlphaVN.com Jun 3, 2013 10:40AM

India (© Donald Edwards/age fotostock)After notching nearly 30% sales growth over the previous two year auto sales in India declined 7% in 2012, the first annual decline in a decade. The car market in India is going through its worst time in recent memory as sales have dropped in May for the seventh month in a row. Sales dropped 9.0% year over year in May to just 183,468 cars. This was only slightly better than the 10.4% drop recorded in April, suggesting that there is still a lot more room for the market to contract given the changes to the cost structures of car ownership and slowing real economic growth.


Car sales in India, at the margin, are being squeezed for a plethora of reason. Chief among them are the Reserve Bank of India hiking interest rates, rising fuel costs both because of the heavy devaluation of the rupee in the past year and the phasing out of subsidies for diesel fuel.


India has been seen as the next great growth market for car sales because when compared to China per capita car ownership lags behind. But both markets experienced growth that was the result of a false cost of ownership signal due to subsidized fuel prices. The current contraction in auto sales is the longest in the 16 years that the Society of Indian Automobile Manufacturers (SIAM) has been collecting that data.


The Indian government tried to shield the industry from the effects of the falling rupee and the rising price of Brent crude by keeping the diesel subsidy in place. This kept the CPI low and allowed for more accommodative monetary policy, which resulted in a boom of car sales that can no longer be supported.


Overall, the market leaders, with the exception of Hyundai, all saw large sales declines. By standing still, Hyundai gained market share. It should be distressing for companies like Ford (F) and Toyota (TM), which are having trouble re-establishing sales here. Ford's struggles in Europe are well documented, and with Japanese sales in China back on the rise growth there will be limited. The big winners were Renault and GM (GM). GM sold 40% more vehicles year over year due to the introduction of two new models and does not expect to see continued growth near that rate.

Company

May-12      

May-13       

% Change   

2012 Share  

2013 Share

Maruti Suzuki

89,478

77,821

-13.0%

44.4%

42.4%

Hyundai Motors India    

32,010

32,102

0.3%

15.9%

17.5%

Tata Motors

20,503

11,134

-45.7%

10.2%

6.1%

Mahindra & Mahindra

21,154

22,244

5.2%

10.5%

12.1%

Toyota Kirloskar

15,501

10,023

-35.3%

7.7%

5.5%

General Motors

6,079

8,500

39.8%

3.0%

4.6%

Ford India

6,036

4,002

-33.7%

3.0%

2.2%

Renault India

438

6,300

1338.4%

0.2%

3.4%

Honda Cars India

10,334

11,342

9.8%

5.1%

6.2%

Total

201,533

183,468

-9.0%


With the RBI dropping interest rates aggressively recently there is hope locally that sales will pick up by the end of the year. In India where almost 80% of new cars are financed, lower interest rates should have a large impact on sales. According to SIAM's estimates, car sales may rise by 3%-5% by the end of this fiscal year, ending in March 2014.


India is struggling with both a current account and budget deficit that will only be partially mitigated by allowing fuel costs to rise. Recent changes to foreign investment rules were designed to help address these issues by supporting GDP growth but India has deep infrastructural issues and a government that is seeking re-election in 2014 so, policy easing by the RBI is happening right on schedule to try and goose GDP and mollify the discontent brewing over difficult economic conditions.


We expect to see continued backhanded reforms in India over the next four to six quarters as ruinous subsidy policies are scrapped/revised but with offsetting supports put in place in other areas. We saw that with the diesel subsidy where it will be taken away but the subsidy for cooking gas will be increased to quell outrage.


With India so dependent on foreign sources of energy this tug of war between interest rates and fuel costs will continue to play out in the near future. The rupee is currently, like all emerging market currencies, under heavy pressure from the U.S. dollar, but that should subside in the next few months as the FX markets stabilize along with the Japanese Yen. Auto investors should not be looking at India for serious organic growth for the next 12 to 18 months until we are passed the elections and the full effects of winding down a number of subsidies have been absorbed by the market there.

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