Demand Slowdown in Auto Sector

There is no denying that the auto industry is currently in the midst of a slowdown with both urban and rural auto sales indicators pointing to a decline. Passenger vehicles, two wheelers, tractors and heavy vehicle sales are down significantly. Many companies have announced a slew of measures including the introduction of non-workings day to curb production and save the bottom line. Many full-time employees have also been laid off.  Contractual workers are uncertain about their earnings, as the non-working day directly impacts their livelihood. 

How did we reach here?

Driven by factors like crisis in the Non-Banking Financial Companies (NBFCs) leading to lower liquidity, sharp cost pressure due to regulatory changes, higher interest rates, weak consumer sentiment and stiff competition from organised pre-owned vehicle, the current slowdown in the sector has been in the making for a year now. Today the inventory with dealers is sizable. This is the case across all the segments of the auto industry.  Companies have been trying to pass on the benefit of weak commodity prices by way of aggressive discounts to consumers. However, this has done little to boost consumer demand. 

Are we nearly out of this fix?

Currently, both cyclical and structural issues are plaguing the auto industry. Demand pickup in the balance of the festival season is important, especially considering high dealer inventories. Historically, festive seasons have seen a boost in the consumption pattern, especially for house and cars. The auto industry is looking at this period to revive growth and possibly turn the corner. Companies are providing consumers with many incentives to kickstart the cycle. Lower interest rates may also be beneficial. The liquidity in the system is better now, however, credit offtake is still low. Lower interest rates may attract consumers sitting on the fence. 

Significant measures will be required by both companies and the government to give an impetus to demand, this festive season. This slowdown is the worst in a decade, therefore, the industry is expecting sops from the government in the form of lower GST rates and other benefits that would help in the industry recovery. It is a wait and watch if this Diwali brings joy to both consumer and industry.