The silent SOS from the automobile sector

News of factory closures always comes as a shock, even if it was known months in advance. The closure of Ford’s plants in Sanand, Gujarat and in Chennai, TN is one such news.

News of factory closures always comes as a shock, even if it was known months in advance. They affect thousands of employees directly, and adversely impact hundreds of MSMEs who provide services and raw material to the factory. The closure of Ford’s plants in Sanand, Gujarat and in Chennai, TN is one such news.

Here I discuss why it is not a one-off, even though several columns have been written about the mistakes made by the pioneer of the mass manufacture of cars. Ironically, the maker of the Model-T, the first Janata Car, did not read the price-sensitive Indian market, and had no models in the sub-6 lakh segment, apart from other strategic mistakes. India’s car market is curiously M-shaped, with the brute majority of cars selling at really low costs and thin margins, in a market acutely sensitive to fuel prices; and a small minority of high-end luxury wheels selling at huge margins to demanding customers. The European trio (Mercedes, Audi & BMW) along with Volkswagen had already captured the other end of the M. The mid-segment of sedans and SUVs has neither the volumes nor the margins to sustain a business, which is where Ford and GM (which exited in 2017) fell to their deaths.

But schadenfreude and I-told-you-so aside, it is still the case that large factory floors will be abandoned, and over 4,000 skilled workers out of a job, in the worst of times. Following the exit of GM, it leads to the de-Americanization of the Indian mass car market, leaving it almost entirely in Korean and Japanese hands.

Nevertheless, those carmakers are not breathing easy, either. Here are five problems (given we live in the listicle era), and what could be done to mitigate them, if not solve them outright.

Global chip shortage

Multiple lockdowns and factory closures eventually led to massive disruptions in supply chain worldwide. With chipmakers concentrated in a few East Asian countries which were strongly affected by COVID-19, multiple carmakers have faced slowdowns or unproductive days at their factories. This has in turn led to vehicle deliveries being delayed, threatening to dampen sales during an otherwise rising market, especially in the festive season. The parallel container shortage has also meant a dampener of vehicle exports.

While the problem may blow over in a few months as international trade resumes its normal pace (and geopolitical tensions with China do not blow up), a long-term solution would require the government to incentivize chip-making in India. Not only automakers, but makers of various electronics and white goods (such as ‘smart’ washing machines) will benefit, passing on coast advantages to the consumer. With the Internet of Things on the rise and more smart cities planned, it is perhaps time to get two mangoes with one stone.

Jump from Bharat IV to VI

Pre-pandemic (which is increasingly sounding like ancient history), unsold stocks were piling up as people waited for the Bharat VI emission norms to set in. After all, who would want to be saddled with a car whose resale value was practically scrap? This sadly meant huge sunk costs (cars made but not sellable) and retooling costs. Although the Bharat series emission norms track the Euro ones by a couple of years, the government’s big jump was not welcomed everywhere, even though the move is a good one for the planet (less CO2) and people (more kilometres per rupee spent on ever-costlier fuel). Though faced with the climate change crisis and other issues, corporate India has held its peace.

I am sure there will be a Bharat VII and a Bharat VIII unless the internal combustion engine is made history by electric vehicles. I am stating the obvious that better planning by the government and coordination with automakers will surely help, so both customers and manufacturers can seize the opportunity to do a nice turn by the planet.

No cut in GST

This has perhaps been a sore point ever since the tax was introduced on the midnight of July1, 2017. Stiff rates ranging from 18 to 28% have damped the enthusiasm for car ownership somewhat.

Cars are still treated as a luxury good, in a time when most cities in India do not have adequate public transport, barring a few showpiece metros. It is perhaps a hangover of the old license-raj mindset, even as the growing middle-class considers car ownership as a milestone in life, along with home ownership. Given that a large component of the government’s revenue comes from fuel taxes, a haircut in GST rates will only be beneficial to taxer and taxed, by boosting sales volumes (a truism applicable for all sectors, I guess).

The government’s push to EVs

Let’s face it – EV’s are still expensive, there aren’t too many charging stations and service centers ready to serve a mass conversion to electric. We as a country don’t have so much of a surplus in electricity either. The long-term vision is good, but the cautionary tale of Sri Lanka must be given as an example. Our southern neighbor is seeing agricultural output shrink by 50% after a surprise push to going organic overnight, without a roadmap or compensation for farmers who suddenly find themselves on the wrong side of the law for using pesticides and fertilizers.

It may perhaps be wiser to spend more resources on educating the public about EVs first, given the lukewarm enthusiasm among public today.

Rising input costs

I have already mentioned the container shortage. This has also led to a shortage of the things inside them – engine components, tyres and wheels, greases and other industrial chemicals, machinery and so on. Not to mention that the large market for imported vehicles, whether they come in CBU, CKD or SKD formats is also affected. Economics 101 says that if supply goes down in the face of constant demand, prices will rise. For things that are shipped within the country, the rise in fuel prices (and the soaring international price of coal), has meant that iron and steel for vehicle bodies have also risen in price.

Prices are of course, subject to fluctuations, but raising prices on cars is a risky move. Players will probably have to look at digesting some losses.

But the situation is not that terribly bleak. Two announcements by government certainly look towards helping the market. The new scrappage policy is a win-win, incentivizing vehicle owners (especially commercial vehicles) to move to newer, fuel-efficient vehicles instead of the rattle-trap smoke-machines that often threaten us on the road. It also brings in valuable components and steel for factories. And hopefully, it will professionalize what has been for long a baap-and-beta small scale business.

The Performance-Linked Incentive scheme that has a huge push for drones and EVs will certainly be received by Mother Earth happily, although the lack of immediate relief will have elicited groans in corporate boardrooms. But in the long time, it will lead to Schumpeter’s Gale- the creative destruction of inefficient and out-of-date business models by new technology. And that’s a call we need to hear.

Author: Sanjay Dangi, Director – Authum Investment and Infrastructure Ltd

Disclaimer: The views and opinions expressed in this article are solely those of the original author. These views and opinions do not represent those of The Indian Express Group or its employees.

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