INDIAN AUTO INDUSTRY IN FOR A BUMPY RIDE

UNCLAS NEW DELHI 000252 E.O. 12958: N/A TAGS: ECON EFIN ETRD PREL WTO SUBJECT: INDIAN AUTO INDUSTRY IN FOR A BUMPY RIDE REF: STATE 04753 1.(U) Summary: The Indian auto industry is considered symbolic of the greater India Inc. success story. Over the past five years, the sector has registered an average 17 percent growth rate annually. Despite hopes that the industry would not be affected by the economic slowdown, vehicle sales have plummeted due to limited availability of credit and weakened consumer sentiment. Auto component manufacturers are taking a hit from decreasing domestic sales combined with recession-hit export markets. As a result, car plants are closing and temporary workers are losing their jobs, especially within the largely unorganized auto component sector. In response, the government has included measures to assist the ailing sector in its two stimulus packages, announced in Dec 08 and January ¶09. The degree to which these measures have helped are yet to be determined. Even as auto companies remain optimistic, launching over 50 new models this year, industry experts anticipate less than one percent growth for this fiscal year. END SUMMARY Background -------------- 2.(U) The Indian auto industry is widely considered a national success story. Dominated through the 1980s by a few manufacturers, economic liberalization and removal of licensing requirements in 1991 allowed for the emergence of new domestic players as well as entry of several foreign companies. According to the Society of Indian Automobile Manufacturers (SIAM),the automotive industry has enjoyed strong growth at an average rate of 17 percent annually for the past five years. Exports in the automotive sector have grown at an average compounded annual growth rate (CAGR) of 30 percent. During the same time period, sales in various segments of the vehicle market have grown at healthy rates ranging from 15 to 27 percent annually. 3.(U) India is the fastest growing automobile market in the world. By 2030, the country is expected to become the world's third largest automobile market behind only China and the U.S. As the Indian auto industry responds to its own growing market, it has become more efficient in the development of low-cost vehicles, which it also markets to Asia, Africa and South America. Tata Motor's Nano, unveiled in January 2008, is being touted as the cheapest car in the world and has become a symbol of national pride. The purchase of Jaguar and Land Rover (JLR) by Tata Motors has similarly been heralded as symbolic of India's emerging role as an economic leader in the auto market. Despite the strong growth, India's contribution in global terms is still relatively low, producing only 2.37 percent of the world's vehicles. Industry insiders anticipate this to change: according to a recent report by KPMG on the future of the auto industry, auto executives world-wide expect India's auto-makers to increase their share of the global market more than any others over the next decade. 4.(SBU) In part due to the thriving domestic auto sector, the auto-component industry has developed into an outsourcing spot for auto-makers around the globe. Nearly all large auto-makers, or original equipment manufacturers (OEMs),have outsourcing operations in India. As recently as November, Ajay Shankar, Secretary at the Department of Industrial Policy and Promotion within the Ministry of Commerce, noted the strength of the auto-component sector and its immunity to the economic crisis. Slowdown in Sales -------------- 5.(U) The financial crisis and global economic slump has resulted in a sharp decline in car sales in India. In December, total domestic vehicle sales, including all segments, declined by 18.2 percent over December 2007. Only 597,000 vehicles were sold in December 2008 as compared to 730,000 vehicles in December 2007. According to figures released by SIAM, passenger car sales in December declined for the fourth consecutive month. Tata Motors reported a 25 percent decrease in sales for December while Maruti Suzuki India, the domestic passenger car leader, saw a ten percent decrease. Maruti Suzuki also anticipates a 14 percent year-on-year decline in volumes and a four percent decline in revenue growth for year-over-year sales. Initial estimates for January 2009 indicate further decreases. 6.(U) Commercial vehicles, often considered a bellwether for the industry, posted their sharpest decrease in 11 years as sales declined 58.2 percent in December compared to December 2007. In December 2007, commercial vehicle makers sold 42,961 units. In Dec 2008, only 17,920 units were sold. Initial estimates for January sales of commercial vehicles are dismal. SIAM estimates that sales in the segment dropped 51 percent in January 2009 over the same month in 2008. Industry Leader Struggles -------------- 7.(SBU) In a Jan.14 meeting with the DCM, Tata North America representative David Good reported that almost every market segment in which the conglomerate operates has been impacted by the slowing global economy, including the auto sector. In addition, financial markets continue to be difficult to access. Chairman Ratan Tata sent out a memo to all company executives advising them that their focus in the near term should be on preserving cash and capital in their business unit. Good noted that Tata was contributing some additional capital to Jaguar Land Rover (JLR) but it would likely need more funds, including hopefully from the UK govt. Tata Motors originally planned to finance the $3 billion loan used to acquire the company from investors abroad, but now is offering up to 11 percent interest for three-year deposits. Tata Auto Components (TACO),which is oriented towards the domestic Indian auto market, had seen sales decline 25% or more and was in a difficult capital situation - possibly requiring additional funding or some sort of restructuring. 8.(U) Local media further report that Tata Motors has struggled to pay vendors and suppliers over the past several months. The Delhi-based Automotive Component Manufacturers Association (ACMA) estimates that Tata Motors owes suppliers within the Association about Rs.450 crore (approximately USD $92.5 million). Factories Put the Brakes on Production -------------- 9.(U) The drop in sales has resulted in over-stocked inventories and dealers unable to pay off vendors, leading manufacturers to cut production by as much as 74 percent, according to SIAM figures. Great concern has spread across the sector as auto-manufacturers have temporarily shut down plants and implemented lay-offs of nearly 150,000 contractual employees. According to local media, the largest commercial vehicle company, Ashok Leyland Ltd., has cut the number of days its factories work to three days a week. Tata Motors shut down production at its commercial vehicle plant in Jamshedpur several times since November 2008, while Mahindra & Mahindra closed five of its plants for a few days in December. Similarly, General Motors (GM) cut production in India by 10 percent, closing its plants briefly at the end of the year and scaling back its set target of 85,000 units from one plant to 70,000. Auto-makers located near Pune, which include Tata Motors, Bajaj Auto Ltd., Force Motors Ltd. and General Motors, have reportedly reduced production by 50-60 percent, in some cases closing plants for up to 15 days. Small Component Manufacturers Hang On -------------- 10.(U) As Indian auto-makers, which account for 80 percent of the business to the Indian auto component sector, slow production, auto-component makers, especially small ancillary units, are being hit hard. Troubles abroad have compounded the problem: approximately 50 component makers in India export directly to the Big Three (General Motors, Ford Motors, and Chrysler) in the U.S. with annual exports totaling close to $1 billion. The U.S. auto industry purchases about 27 percent of India's total component exports, with the Big Three taking a significant combined share. For example, 10 percent of the exports of India's largest auto component exporter, Bharat Forge, goes to the US auto sector. European auto-makers make up approximately 38 percent of the export market. As the U.S. and European auto industries struggle, export earnings have dropped. 11.(U) Local media reports that several thousand ancillary component makers, which are classified as small enterprises, closed for several days at the end of 2008. Several of the units that closed are considered Tier III suppliers, which survive on contracts from finished component makers (Tier II) or automobile manufacturers (Tier I). For example, when Tata Motors closed its commercial vehicle plant in Jamshedpur for 17 days during November and December, 157 auto component vendors that supply the Tata Motors plant were affected. Most Tier II and Tier III component makers are based near cities that are considered developed "auto clusters," including Pune, Chennai, Gurgaon and Uttarakhand. One report suggests that as many as 3,500 of the 7,000 small-scale units located in the industrial belt of Pimpri-Chinchwad (near Pune) closed operations at the end of the year. The closures and reduced production have caused 50,000-60,000 temporary contract workers to lose their jobs at the surrounding auto-component plants. 12.(SBU) EconOff in Chennai met with a representative of Ford India, who noted that while the company's component suppliers are managing to stay afloat, they are struggling with lower volumes. The Ford contact also commented that component suppliers would be able to make it for at least another six months of downturn. Credit Crunch Drives Down Consumer Confidence -------------- - 13.(SBU) Embassy ECONoff met with Gaurav Saxena, General Manager of Mahindra and Mahindra; Dilip Chenoy, Director General and Sugato Sen, Senior Director of SIAM; and Jalaj Gupta, Regional Manager of Passenger Car Business at Tata Motors. In each meeting, contacts blamed the drop in sales on two factors: the unavailability of finance and weakened consumer sentiment. According to Chenoy and Saxena, 75-80 percent of passenger cars and 50 percent of two-wheelers sold in India are financed by loans. Due to the liquidity crunch, banks have been unable to provide loans and buyers are discouraged by high interest rates at 14-15 percent. Saxena described sales in two segments for Mahindra and Mahindra-the personal and the commercial segments. In the personal segment, consumers have postponed purchases due to high interest rates, which lead to high equated monthly installments (EMI). According to Saxena and Gupta, EMI is the main thing consumers consider when purchasing a vehicle. Saxena also noted that banks are currently more reluctant than usual to lend to those employed in the unorganized or informal sector, further restricting sales. In the commercial vehicle segment, high interest rates have discouraged vehicle purchases as unprofitable. 14.(U) Auto-component makers have also been hit by the credit crunch. Commercial banks have reportedly been reluctant to provide credit to auto component exporters, and credit risk insurance companies, including the Export Credit Guarantee Corporation of India (ECGC),have refused to give packing credit cover to auto component suppliers due to fears of default from struggling US auto makers. Industry insiders report that banks and credit risk insurance companies are reviewing applications on a case-by-case basis. The lack of available credit is delaying fulfillment of orders, leading to penalties and a loss of business for component makers. As a result, companies are reportedly worried they will loose their competitive edge with US car companies, which account for nearly 30 percent of their export business and are some of the biggest buyers in the industry. 15.(SBU) Industry contacts indicate that sales continue to suffer not only due to the liquidity crunch, but from weakened consumer sentiment caused by the economic slowdown, and, to a lesser extent, the Mumbai attacks in November. As a result, the companies are turning towards rural and semi-urban environments, viewing the economic crisis as more of an "urban phenomenon." Saxena of Mahindra believes rural populations maintain higher savings rates and are not as affected by other economic issues, such as rising real estate prices, and are therefore better able to purchase vehicles. No Subsidies, But Government Stimulus Packages Help -------------- -------------- 16.(SBU) While there have been no direct subsidies to the auto industry, within the two government stimulus packages announced in December 2008 and January 2009 several measures were introduced to assist the ailing sector. Auto industry representatives in general report that it is too soon to tell how effective the stimulus packages are; however, certain elements seem more helpful than others. Post is unaware of any subsidies or provisions linked to export or local content requirements. 17.(SBU) In December, the government reduced the excise tax by four percent. Both Jalal Gupta from Tata Motors and Chenoy at SIAM said that it is still too soon to know whether or not the reduction in excise tax would help sales. SIAM and Mahindra both noted that even if the reduction has stimulated demand, the inventories stocked were purchased prior to the excise tax reduction, and the cost of the excise tax had already been passed down to dealerships. As a result, consumers demanded the reduction in the cost of the vehicle, and dealers had to provide it even though they were not receiving the same discount from auto-makers. Dealerships are now requesting reimbursements from auto-makers for cars purchased with the higher excise tax and sold at the lower excise tax rate. When asked about reimbursements, Saxena at Mahindra remarked that a 100 percent reimbursement to dealerships would not be possible, but the company is looking to reimburse dealerships by an amount yet to be determined. 18.(SBU) Elements of the second stimulus package that auto-makers believe will be most valuable are those that increase liquidity. Hence, the reduction of the cash reserve ratio (CRR) for banks from 5.5 to 5 percent and a line of credit in the amount of Rs 25,000 crore to NBFCs (non-bank financial institutions),which are generally active in funding commercial vehicles, are viewed by auto-makers as the most helpful. In addition, commercial vehicle manufacturers expect demand to increase with accelerated depreciation of 50 percent on vehicles purchased between January - March this year. Funding provided for highways and port projects by the stimulus package (Rs 250 billion) as well as to the India Infrastructure Finance Company (about Rs 300 billion) is also hoped to revive the commercial vehicle sector. 19.(SBU) According to SIAM, the reduction in prices of raw materials should also help the sector. Over the past two years, the increases in the prices of steel and rubber have raised the costs of manufacturing. As steel and other commodity prices drop, contracts will be renegotiated, and profit margins may look better. Steel accounts for almost half of total costs and is supplied on fixed terms of three, six, or 12 months. 20.(U) FICCI (Federation of Indian Chambers of Commerce and Industry) has recently requested an income tax holiday for manufacturers, import duty concessions on machinery and incentives for eco-cars to further assist the auto industry. Citing assistance given by China, Brazil, Thailand and Malaysia, FICCI claims the assistance is necessary for the sector to remain competitive. 21.(SBU) When ECONoff asked Sen at SIAM if the auto industry group planned to request additional assistance, Sen said that auto-makers fear that they now face a climate in which consumers are waiting for the next round of lower prices resulting from government assistance to the industry, and that the government and industry need to signal that prices have now reached a floor and will not continue to drop. Experts Forecast Slow Growth for Next Year -------------- 22.(SBU) Industry experts forecast the slowdown to last for another six to eight months and predict the industry will struggle to maintain single digit growth (perhaps as low as one percent) for the next fiscal year. The National Council of Applied Economic Research (NCAER) predicts demand for passenger cars and two-wheelers to continue to contract through the end of the next fiscal year in March 2010. Sen at SIAM predicted that the industry will post positive growth of just under one percent, with most growth coming from sales in the motorcycle and two wheeler segments, and not in the commercial or passenger vehicle segments. Dilip Chenoy at SIAM predicts growth will rebound when lower interest rates are implemented by banks and credit for commercial vehicle purchases becomes available. 23.(U) While auto-makers acknowledge 2009 will be a tough year, they remain hopeful that with likely cuts in interest rates sales will bounce back and plan to launch 50 new models this year. In January, Mahindra launched the Xylo, a multi-purpose vehicle set to compete with Toyota's minivan and is working on a new premium SUV. Tata Motors still anticipates a highly successful launch of the Nano. ¶24. Comment:(U) While the auto sector is currently experiencing a dramatic fall in sales, government stimulus packages aimed at increasing liquidity may prove helpful over the course of the next several months, allowing the struggling industry to rebound back to strong growth rates in 2010. END COMMENT. MULFORD