Tough Road Ahead for India Carmakers as Boom Market Crashes
India's annual car sales fell for the first time in a decade in the just-ended financial year, official data will show on Wednesday, calling into question bullish growth expectations that fueled billion-dollar bets from global manufacturers.
Carmakers in India, two years ago the world's hottest growth market after China, have seen high interest rates, rising fuel prices and prolonged economic gloom turn an industry recently growing at 30 percent a year into one plagued by huge discounts, showrooms full of unsold cars, and chronic overcapacity.
Quitting India is not an option for global majors such as Ford and Volkswagen, given its huge population, rising incomes and long-term potential. But manufacturers that have sunk billions into the country are likely to pare back expansion plans as economic troubles persist.
"The industry, like the rest of the economy, has slowed down very substantially," R.C. Bhargava, chairman of market leader Maruti Suzuki, told Reuters.
While surging sales of SUVs have been a bright spot for some manufacturers, sales of the smaller cars that account for most of the passenger vehicle market have crashed this year.
"Everything has slowed down by two to three years," Bhargava said.
"Everybody has to consolidate their operations, look how to manage with less, do more with less ... This recessionary period will force people to be more efficient."
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Car sales in the first 11 months of the financial year that ended March 31 were down an annual 4.6 percent, and in March sales fell for almost all carmakers in India. The official data for March and for the full year will be released by the Society of Indian Automobile Manufacturers (SIAM) on Wednesday.
Last year, car sales grew 2.2 percent in India.
The immediate future looks mostly gloomy for an industry that experts had expected to ring up annual car sales of 9 million by 2020 from less than 2 million this year, but looks set to significantly undershoot that target.
"I don't think those goals are going to happen in that timeframe," said Bhargava. "Conditions have changed a lot".
Sales will continue to remain weak in 2013, executives said, with a rebound only likely after a substantial cut in interest rates and sustained improvement in the country's economic growth, which in the last financial year fell to its lowest in a decade.
"In the absence of any positive stimulus and sentiments ... We foresee the pressure on volumes to continue until there is significant improvement in macro-economic factors," said Rakesh Srivastava, senior vice president of Hyundai Indian unit, which like Maruti specializes in small cars.
Hyundai, India's No. 2 carmaker, has weathered the storm better than others, registering flat growth. Global rivals such as General Motors, Ford, Toyota and Volkswagen have seen already underwhelming sales volumes fall by as much as 20 percent.
In 2011, when sales were rising 30 percent a year, Ford and Maruti wrote Checks for around $1 billion each to build plants in the western state of Gujarat.
Last month, Tata Motors factory in Gujarat, built solely to manufacture its much-vaunted low-cost Nano, cranked out just 1,282 cars, a miserly 6 percent of total possible capacity at the 250,000 cars a year plant.
Tata has been India's worst-performing major carmaker this year, with car sales plunging almost 30 percent, but its capacity utilization woes are mirrored across the industry, where a race to ramp up in recent years has created a glut.
India's total passenger vehicle production capacity stands at around 4.9 million, meaning the average industry utilization level stands at just under 55 percent. Total capacity is slated to hit 5.5 million by the end of 2015.
"I suspect everybody will re-evaluate the time when they need new capacity," said Bhargava, adding that his company, controlled by Japan's Suzuki Motor Corp <7269.T>, would likely open its new plant in Gujarat in late 2015, later than planned.
The only bright spot has been a surge in demand for sport utility vehicles (SUVs). Sales of off-road and crossover models grew by over 50 percent over the past 12 months, providing incremental growth for some manufacturers.
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Mahindra and Mahindra Ltd, a domestic SUV specialist, grew its passenger vehicle sales by 27 percent in the last fiscal year, while Renault SA <RENA.PA> sold almost 40,000 of its budget SUV Dusters, which it launched in July.
Sales of SUVs and vans are not counted as part of the passenger car figures released by SIAM. Including both cars and SUVs, overall passenger vehicles sales rose an annual 4.1 percent between April and February.
Even SUV sales, helped by cheap diesel, are starting to show signs of slowing growth as the government moves to reduce its subsidy on the fuel, while a recent rise in tax on the vehicles may curb demand.
"Any meaningful growth recovery will likely happen only in FY15E," Macquarie wrote in a recent research report, referring to the financial year that ends in March 2015.