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Auto sector – on the verge of inflexion point

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The slowdown in auto sector is quite evident from the data of the last ten months. The domestic passenger vehicles sales again fell drastically by 32% in August while passenger car sales fell by 42% year on year. It is not only India, but also across the world capitals there has been a slump in the sector which can be attribute to many reasons.

The sector has been crushed by the double whammy of shift in consumer behaviour and slump in demand. The consumers are moving towards cab aggregators, using public transport such as metros and looking for EVs. Nowadays consumers do not see a car as an aspirational product in India which was also highlighted by Uday Kotak, MD of Kotak Bank at the SIAM conference. Car manufactures like Volkswagen, Mercedes and Toyota have started on the leasing space just like Zoom Car and Myles leading to innovation in business model. The government has been eyeing to build a national shared mobility platform which will be a watershed moment in the transport sector. In the era of BS-VI norms, there is also an anxiety regarding the continuance of diesel cars in the long term. Lack of parking space, bad condition of roads and never-ending traffic woes has also played on the minds of the consumer.

The slump in demand has been primarily due non availability of capital in the hand of buyers. In the area of automotive financing nationalised and private banks caters to 30-35% of total sales, the rest are usually financed by the non-banking financial companies (NBFCs). The banks usually cover the good borrowers, while the NBFCs focus on the riskier ones. With the IL&FS crisis the NBFCs are in doldrums and are not able to finance the buyers. The cost of cars has increased by more than 10% in last one year owing to mandatory additions such as reverse sensors, airbag and crash conformity standards. It has also been made mandatory to buy three-year insurance rather than one year has pushed the cost of ownership of the car.

Indian auto sector has been shielded by various governments through high custom rates on imported luxury cars, low safety norms and favourable ecosystem. Productivity for Indian auto sector is one third of that of China and thrived on low regulatory standards. The high growth rate in this sector was not sustainable in the long run and has reached an inflexion point.

May be an GST cut will help to spike the sales for now, but its not the solution for the sector. The government has taken measures such as increase in depreciation cost for businesses, all BS-IV vehicles will be allowed to remain operational for their entire period of registration, increase in vehicle registration fees has been deferred till June 2020 and currently considering to introduce a scrappage policy.

We as a nation trying to build metros, innovate on shared mobility, better traffic management, follow strict emission and safety norms inherently want people to use more public transport system and thereby reducing vehicles on the road. At this juncture, the inflexion point has reached where automobile manufactures will have to brace for the change.

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