I was reading yesterday about how two hundred US business leaders who came together in New York at the Business Roundtable categorically stated that shareholder value cannot remain their paramount concern and primary job, and that they should be investing in employees, delivering value to customers, and dealing fairly and ethically with suppliers. I was trying to recall when if ever the SIAM, which I have known since its days as the AIAM, has ever made a similar declaration of purpose or intent. Try as I might, I could not.
On the other hand, I have been reading statements by Indian auto industry people calling for a reduction in GST rates and a variety of other support packages, ostensibly because tens of thousands of jobs are likely to be lost if the slowdown continues. Coming from an industry that has been at the forefront of running regular operations with contract and casual workers, this concern for jobs and employment, is a little rich. Running to the government cap in hand, at the first signs of a business downturn, hardly behoves such well-established industrial giants. At the risk of sounding harsh, it eerily reminds me of how the CEOs of America's Big Three automakers flew in their corporate jets to Washington in November 2008 to ask the government for a bail out, and were relentlessly pilloried both by the media and the political executive for that display of habitual profligacy.
Trucks and tractors are more in the nature of capital goods, and therefore have different dynamics. So, let me restrict myself in this article to the passenger car and 2-wheeler sectors. Has anyone totted up the gross profits of India's top three car makers and the top three 2-wheeler manufacturers over the last ten years? If I recall right just the top three 2-wheeler manufacturers made more Rs 12,500 crore in gross profits last year. One would imagine that an industry that has had such an unprecedented and extended run of profitability for almost a decade, would have enough cash reserves to tide over a dip in fortunes of the sort that we are presently witnessing. Not a meltdown by any standards, what we are seeing is merely a reduction in profitability that is sought to be painted as an apocalypse scenario.
And again this time round, the burden of the auto industry's song seems to be that a variety of increases in registration charges, taxes, fuel prices and insurance costs has made the ownership of personal vehicles unattractive, leading to a protracted slump in purchases and thus creating the threat of a dab of red ink on the well-maintained balance sheets of the industry. That is, at best, a trifle simplistic. We have had periods in the past where each of these increases have been absorbed by consumers, and sales of automakers continued to grow. What is then different this time around?
The growth of the automobile industry in general and the personal vehicle industry in particular, derives from broad-spectrum economic growth - it does not drive it. It is only in countries where the automotive industry is a large exporter, can it be truly seen as a driver of economic growth. Three multinationals account for most of passenger car exports from India, still a small percentage of total production. As for two wheelers, an industry that refers to itself as the world's largest, exports barely 15% of its total production. The auto industry is only a part of the overall economic growth process but one that creates in the process of growth significant deficits in the balance of external trade and payments. The role of the automotive industry in enabling the growth of a globally competitive auto components industry is of course laudable, but even that is minuscule by global standards.
A combination of higher future income expectations and the wealth effect has driven consumer spending particularly for personal vehicles. Clearly this very combination in the reverse is now holding back and constraining demand, and has been doing so for at least the last year. We are presently witnessing a full-fledged business downturn with whatever little growth there is, probably salvaged primarily because of the huge Government sector and the consequent showing of the services sector. The rural sector has witnessed a consistent adverse movement in the terms of trade against agriculture, thereby probably impacting both gross capital formation and high-end consumption expenditure. Speculation driven real estate particularly in the north has crashed, marooning thousands of households, effectively robbing them of their savings and leaving them in debt to banks for homes they may not see for a long time to come, and burdened by repayments out of post-tax incomes. The MSME sector has clearly not bounced back to the growth trajectory of the past. Large manufacturing has been a reluctant investor in future growth. Errant promoters in capital heavy sectors like steel and power generation have left banks unwilling and unable to consider anything remotely resembling project finance. And the IL&FS imbroglio has pushed a hitherto thriving shadow banking industry to despair and worse. The equities market has revelled in its own irrational exuberance, which apparently is now also beginning to wear thin. Logically, what would consumer expectations look like in a situation such as this? So, can personal vehicle demand be sustained?
The growth of shared mobility which helped boost sales volumes for the top two carmakers over the past three years, has now started to impact sales. Its economic benefits too have found resonance. For a car financed to the extent of Rs 6 lakhs and driven for 1500 km every month the effective cost of ownership/operations, with a driver is probably in the region of Rs 28 per kilometre. Shared mobility wins hands down against this arithmetic of ownership costs. And as a new generation of consumers which prioritises experiences over material ownership, and probably prefers to travel to Iceland and post the photographs on Instagram instead of spending on a new car, has grown, shared mobility has soared. I am not aware if the industry has actually modelled the sales impact of shared mobility, but back-of-the-envelope calculations suggest that each shared mobility vehicle might have replaced between four and five new cars. And if this is happening to cars today, there is no reason that it will not happen to 2-wheelers tomorrow.
The auto industry had apparently preferred to adopt an ostrich-like stance in not recognising these realities earlier. With the majority of sales teams in the auto industry believing that billing to dealers is equal to sales, a shadow banking sector willing to bankroll dealer inventories and a dealer fraternity too scared to resist unprincipled billing, the day of reckoning has been consistently pushed forward. And then, dealerships across brands started defaulting first and then going bankrupt eventually. The inventory funding dried up, dealers with overflowing stockyards threw up their hands, and the music stopped for auto manufacturers. Is today's problem then partly also a creation of the myopia of the industry?
It is this set of circumstances that raises doubts about the repeated demand by the auto industry for a reduction in duties. If affordability is really such a concern, could the industry start by looking at its own costing and pricing structures. After all, why should only the Govt of India bear the brunt of lowered revenues? Perhaps, the multinationals for instance, could start by deciding to hold back payments of royalties and technology fees to their parent companies till the Indian market improves or the next three years, whichever is later. Perhaps the Indian affiliates can start by extracting higher prices for their exports, and better terms on their imports of components from their parents or members of their keiretsu. Perhaps it might help if the government brought back a BICP kind of body to 'guide' industry appropriately? Or maybe, frugality in operating costs and belt-tightening on salaries might actually enable industry to improve cost structures significantly. And of course, there is always the option of calibrating profitability at the gross level of Indian companies, particularly the MNC affiliates, with that of their global peers. It has been often estimated by industry insiders that Toyota India for instance probably makes margins of 50% and 100% on their two largest selling models. And when the Toyota Camry Hybrid which retails for an average of under USD 30,000 in the US, is retailed for Rs 37 lakhs in India, the net realisation for the company on the latter is probably at least 25% higher! And if Toyota is the benchmark, it is inconceivable that Maruti Suzuki or Hyundai India would be far behind. If industry really believes that affordability has to be tackled, let it start by cutting pre-GST prices of vehicles across the board for a period of six months and see how the effective GST burden and the incidence of insurance costs on the consumer also come down.
And then, of course wait for the next three disruptions to come by, and then rethink life all over again!
The writer is former President of Hyundai Motor India who manages a boutique strategy advisory firm Beyond Visual Range. He also authored 'Santro - The Car That built A Company'.