Tumbling sales in auto sector have led to massive job cuts in the industry. Automakers like Mahindra and Mahindra have claimed that they have done enough 'belt tightening' and now it is time for the government to provide some relief to the sector. They have also claimed that plants are being shut for 5-7 days every month for the past four months and if the situation worsens, the industry could be staring at more job cuts. Dr Pawan Goenka, Managing Director of Mahindra and Mahindra, spoke to TV Today Executive Editor Sahil Joshi and emphasised that a lot can be done when it comes to reducing vehicle pricing to make the situation better:
Question: This is third consecutive quarter that is eyeing downturn in auto sector. How deep is the crisis?
Answer: It's actually the fourth consecutive quarter. This time around, the downturn appears to be quite widespread. We have had similar situations in 2008-09 and 2013-14 but this time every segment of the industry -- passenger vehicles, SUVs, small and large commercial vehicles, two- and three-wheelers -- everything is in the de-growth phase. So, I would say it's a fairly deep downturn. Look at the numbers themselves from last 4 months of this financial year -- passenger vehicles industry is down by 22 per cent, two-wheelers about 13 per cent, commercial vehicles around 14 per cent. Now those are fairly significant de-growth numbers and that's been sustaining for almost 4 months and getting worse every month.
Question: What do you think are the reasons that led to this situation?
Answer: It's difficult to point out one particular thing, and these are all guesstimates because nobody really knows, but I would generally put it into two buckets. First is the whole financing including wholesale financing and retail financing. Problem is not so much of liquidity but more of NBFCs which are major financiers of automotives. They tightened credit norms because there was stress on NBFCs, which is reasonable from their view point but has an impact on the growth because 8 to 10 per cent of potential buyers are unable to get finances. Second is interest rates. Policy rates have been reduced by 110 basis points now but have not really been passed on in a major way to the consumer. So these are the two things.
Question: Isn't it also the overall economy?
Answer: Yes, what I mentioned is only the financing part of it but the second part is that overall transaction cost has gone up substantially in the last 2 to 3 years. It didn't happen overnight. It is the cumulative effect of many things that have happened over the last 2 to 3 years. This comes from regulatory changes which are required but have an impact on vehicle price that includes registration tax which keeps going up, road tax which many states have increased by almost 2 to 3 per cent in the last 2 years. This also includes extra cost of insurance, and TDS that has to be paid on vehicles above Rs 10 lakh. All of these together have made the transaction cost very high.
Also the overall economy. Depreciating rupee also has very strong impact on sentiments. And not only that, people often take money out of investments in share prices to buy a car and now that's not happening because prices are depressed. The rural spend has also not really picked up. This has an effect on buying. So, overall I think, since GDP numbers being low, every economic news that comes in is creating more of sentiment problem. So in all I would say financing, transaction cost and overall sentiment of consumers is cumulatively making it hard.
Question: How much will it impact employment?
Answer: Impact on employment is in three parts -- first is of OEMs like Mahindra and others, second is of suppliers and third is of dealers. As far as OEMs are concerned they will be careful, a company like Mahindra will not lay off people easily because we know the importance of employees and it's our responsibility but if this situation continues then we will have to do something. Till now around 2,000 people have been laid off. We are closing plants but not reducing capacity. Since last 4 months plants are being closed for 5 to 7 days. If that continues then there will be a huge loss of employment. But the bigger worry is for suppliers and dealers. If they do not have orders they will have to lay off people and ACMA has already said that around 1 million jobs will be lost if slowdown continues. Even dealers will be impacted in a similar way. Auto industry suppliers, mechanics, dealers, OEMs -- all together is a big chunk of employers. If their employments go down then it will have cascading effect and will become a viscous cycle, which we need to avoid.
Question: So what do you expect from the government? Are you demanding any stimulus or should the government go slow on regulations that are impacting costs?
Answer: As far as the industry is concerned it's easy for us to say that the government should do something. But the government has to look at many things. So we will have to take a balanced view. First, if we talk about financing, then RBI's policy rate cuts in the last 9 months need to be passed on. How government can intervene and force NBFCs, PSUs and private banks to pass on these rate cuts is important.
Second is about fighting norms. We are not saying that there is anything wrong in that but this has had undesirable effect on economy or say on auto sales. So, one may think that NBFCs can give more loans to at least borderline customers. This will also make a lot of difference. Lots of things can be done as far as the transaction price is concerned. What exactly needs to be done regarding that is difficult to say but we can think of slashing GST rates, registrations prices or road tax. Some non-revenue related items like insurances can also be brought back to one year. It will also have a positive effect. If we abolish TDS, that will also make a lot of difference.
Also, if government delays or even removes non-essential regulations without compromising on safety or pollution related norms, it will help in bringing down prices.
Questions: How much effect will electric vehicles or BSVI have on the slowdown?
Answer: Electric vehicles' volume right now is very small and government's thrust is mainly on two- and three-wheelers right now and not on four-wheelers. So there is no reason to say that electric vehicles are slowing us down. And when we look at the total volume, we are including electric vehicles in it so there is de-growth in that sector as well. I have also heard that because of BSVI, consumers are postponing buying BSIV, which is not reasonable because usually the reverse happens. Most of the time, when higher emission norms come people realise that prices will go up. Therefore, they tend to buy sooner. In fact this is the best time to buy. People should, in fact, rush to the dealers as everyone is trying to clear their inventory.
Question: As far as big manufacturers are concerned, what is your strategy for now? Are you in wait and watch mode?
Answer: Look, a 12-month slowdown is quite a big slowdown. In the last 6 months we didn't say anything because in previous 6 months the market was good. So we waited from September '18 to February/March '19 thinking things will change but now that this has continued we are facing a lot of problems. And I think whatever belt-tightening was required has been done by every automaker. But it won't change the slowdown. It will only help in bettering your financials. So to counter this slowdown, vehicle prices need to go down and financing availability need to improve. These two things must be done.
OEMs have already given maximum possible incentive they can give. Going beyond that is as good as saying let's not even make vehicles. So, I would have to say that right now if there is any relief - and I hate to say this - but unfortunately it has to come from the government.