India has seen plenty of automotive sector interest in recent years. It’s a market with huge potential for growth, but a China-style market surge is not in prospect. Indeed, the economic crisis of last year and subsequent slowdown has reinforced a market pause, writes Dave Leggett. The big question is, how long will it last?
When conversation turns to the BRICs, I am always struck by the differences – basic economics, but also political, cultural, attitudes of people – between the four constituent countries of that acronym. The temptation to treat all inhabitants of the BRICs as a homogeneous block of consumers on a linear path to automotive nirvana (well, a Dacia Sandero or Tata Nano) is an ever present danger when looking at emerging markets. Yes, there are some common characteristics, of course. As incomes grow, people everywhere start to acquire the same sorts of goods. And eventually, when they have enough income, a car appears on the wish list.
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But these emerging markets carry some very big differences, too. China and India have similarly sized and vast populations. Each is estimated to be north of 1.2bn souls, but their economies are very different. China has been on a single-minded charge for growth over the past decade, in particular. Arguably, China’s one-party government, collectivist attitudes and a unique state-led version of capitalism has supported that long-term objective. India’s history and political set-up – ‘the world’s largest democracy’ – is somewhat different to China’s. The deregulation and liberalisation of India’s economy is on a different and perhaps more windy path.
As far as the automotive sector is concerned, the differences are stark. The two may have similarly sized populations, but their vehicle markets provide something of a contrast. China’s light vehicle market was close to 22m units in 2013. It’s forecast to grow by as much as another 10% this year. India’s light vehicle market reached just 2.9m units and was down on the previous year.
India’s automotive industry suffered last year, dragged down by slower economic growth, inflation, high interest rates and more expensive fuel. In fact, these negative factors were bad enough for the industry to register its first year on year decline in more than a decade – the last time sales were below the previous year was in 2001, albeit by less than 1%.
India’s economy was rocked by international financial turbulence in the summer. When the US authorities indicated that quantitative easing is on the way out, spelling higher interest rates, capital flooded out of some emerging market economies. India’s economy took a particularly big hit from ‘hot money’ capital flight: its stock market tumbled and the rupee lost 13% of its value versus the dollar in just three months. Confidence was sapped and India’s interest rates have been rising since. India’s annual rate of growth for GDP has dropped to around 4.7% with manufacturing especially hard hit. That sounds respectable but represents a decade-low.
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By GlobalDataConfidence in India remains weak following two consecutive years of weak GDP growth of under 5% (ten years ago it was nearer an annual 10% growth rate), which has led to less job creation, and thus lower income growth. CPI inflation (10.6% on average in Q4 2013) has remained stubbornly high, and is also stoked by a weak rupee. With inflation staying high, India’s central bank is not taking any chances. At the end of January, the Reserve Bank of India (RBI) raised its benchmark lending rate by 25 basis points to 8%. This is the third rate hike since September 2013. There’s also a large budget deficit for the government to contend with, acting as a further constraint to growth.
“Although the RBI has indicated further monetary tightening is unlikely if this latest round of rate hike is able to bring down retail inflation, we cannot completely rule it out. The concern is that India is getting into a vicious cycle – where high interest rates are depressing both demand and investment and aggravating supply bottlenecks, i.e., driving up inflation,” said Ammar Master, senior market analyst for India at LMC Automotive.
Private consumption has slumped since the economic crisis of mid-2013. The start of 2014 has not brought much relied. Sales of cars contracted 7.6% in January from a year earlier. In February, India’s government reacted with an announcement of temporary excise duty cuts to car sales until June 30. Manufacturers reacted quickly to pass on the reductions (amounting to 4% on most vehicles) – that follow a period of steadily rising car prices.
“Immediately, OEMs have passed on the duty benefits to buyers and reduced prices across models. We are, therefore, likely to see a temporary surge in volume in the next few months as buyers take advantage of the lower prices,” said Master.
However, he also noted that there are other negatives at work in the Indian car market, including tighter lending conditions.
Nevertheless, LMC projects 6% growth to 3.11m units for India’s light vehicle market in 2014, helped by higher consumer interest on the back of new model launches at the recent Delhi auto show.
Analyst Deepesh Rathore, Director of Emerging Markets Automotive Advisors, says that the political timetable is also significant this year, with a General Election due in April.
“Besides the economic weakness already in place, there is uncertainty right now surrounding the outcome of elections next month. Things will change for the better if any party gets a clear mandate. However, things could change for the worse if it is a fractured mandate and many parties share power,” Rathore warns.
Rathore sees a flat market for India’s car market this year, with the possibility of 3% growth in a best case scenario.
Another market positive, he agrees, is the launch of new models at the Delhi auto show in January. “Car manufacturers are lining up new models to enthuse the market,” he says. “As many as ten new model launches are lined up for 2014.” Tata unveiled its Bolt, a compact hatchback, and the Zest, a compact sedan. Ford showed a booted Figo concept.
Rathore notes that small-sized vehicles are doing well right now in India. “Small SUVs such as the Ford EcoSport and small sedans (smaller than four-metres) are hot,” he maintains. “Small MPVs may be the next big thing.” Mahindra plans a Ssangyong X100-based small SUV that will be made in India.
Long-term prospects for India remain pretty positive. Given the size of India’s population and future economic growth, incomes will surely rise. A rising urban middle-class will be drawn to car ownership. LMC Automotive forecasts that India’s light vehicle market will grow to 8.2m units by 2020, compared with around 3m units a year now.
At Audi’s annual results conference in Ingolstadt yesterday, sales and marketing director Luca De Meo stressed the importance of India in Audi’s long-term plans. But he also referred to the volatility of the Indian currency as a concern. Fellow premium player BMW has said it is pressing ahead with plans to add models for sale and for manufacture in India. OEMs know that India holds out much hope for very much higher volumes in the future.
But right now, the big questions surround immediate prospects for India’s economy, the upcoming election and the short-term picture. Will this growth slowdown turn out to be a temporary blip or is it indicative of more serious problems ahead for India?
Passenger car sales in India inched up in February – up 1.3% to 160,718 units. The temporary excise duty cut may bring customers back to the market. Analysts and manufacturers will be watching sales trends closely over the next few months, one eye firmly fixed on any movement in the value of the rupee.
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