Indian auto industry to decline by at least 25% in all segments in 2020

The Indian automotive industry is set to continue its struggle in the slow lane and decline by at least 25% across segments this year, states Vinay Piparsania, Global Consulting Director, Counterpoint Research

Vinay Piparsania

India’s automobile industry, the fourth-largest globally by volume, is headed for another year of significant declines as extended lockdowns impact production and consumer demand. Sales volumes of passenger and commercial vehicles are projected to drop to levels not seen in over a decade. At the beginning of the year, the automotive sector was already suffering in the midst of a challenging economy. Compounding this, more stringent environmental and safety regulations, growing popularity of shared mobility platforms and cautious lending by banks and non-banking financial companies (NBFCs) negatively impacted vehicle sales.

The virus pandemic is now making the situation far worse. Based on data reported by the Society of Indian Automobile Manufacturers (SIAM), March passenger vehicle sales declined 51% YoY to 143,014 units. Sales of two-wheelers fell 40% to 866,849 units and commercial vehicles declined 88% to 13,027 units. With a nationwide lockdown in effect from the last week of March, the industry saw zero production and sales of new vehicles in April. While automakers began partial operations in May, it has been an uphill struggle.

Openings were allowed only after receiving due approvals from respective state authorities, and conditional to following safety protocols such as body temperature scanning, social distancing and ensuring high standards of sanitization. Shutting down operations was far easier than reopening factories as companies need to manage complex synchronisation issues. The resumption of operations requires OEMs to coordinate with hundreds of local and global suppliers, logistics partners and thousands of employees.

The biggest challenges come from not having enough workers willing to come back and sufficient and continuous supply of parts. It is likely plants across the country will function with a skeleton staff at least until July. Slow dealership re-openings are another problem. With almost all vehicle sales delivered through them, online sales are a rarity and still under development. As of the last week of May, only 3,500 dealerships were operational around the country, representing 20% of the total network. And amongst these, half were operating only their service departments and not showrooms.

The sharp contraction in sales will also lead to a decline in average manufacturing capacity utilisation. For the PV segment, effective annual capacity utilisation is projected to drop down to as low as 45% from 60% a year ago. Two-wheelers and commercial vehicles will drop to below 50% and 35%, respectively, from 65% and 51% a year ago.

Demand Outlook for 2020

The lack of government policy intervention for the automotive sector in this year’s national budget and also recent fiscal stimulus packages combined with a lack of visibility around when social and economic demand conditions will get back to normal has resulted in Counterpoint Research revising the 2020 forecasts. Our base case outlook sees YoY passenger vehicles, two-wheelers and commercial vehicles declining by 25%, 21% and 28%, respectively. CV sales, in particular, have been languishing under the impact of new axle load norms. They are unlikely to show much recovery this year with freight demand projected to remain low.

Recovery Timing

Demand recovery can only be expected around the festive season in the last quarter of the year. With growing consumer preference for cheaper, personal transport and two-wheelers, motorcycles, in particular, with their higher rural share, will likely be the first category to see a rebound. Should the government develop scrappage schemes and lower interest rates for vehicle loans, along with reduction in sales and road taxes, as seen across Southeast Asia, these interventions could accelerate recovery.

Despite the above challenges, we remain positive over the longer term in view of India’s comparatively low vehicle penetration – 110 two-wheelers and 32 cars per 1,000. Australia has 740, Japan has 591 and China has 164 vehicles per 1,000 individuals. We expect recovery post-2022, helped by improvement in non-banking financial institutions and the overall economy. Combined with a young population, rapid improvements in road infrastructure, growth in rural demand and possible introduction of entry-level passenger cars, this could significantly boost consumer demand.

Note: The nature of the current global health crisis means we cannot rule out further revisions to the global 2020 automotive forecast.