India's Auto Market Also Sucks

We’ve spent the better part of 2019 describing how unwell the automotive markets of China, Europe and North America have become, which might accidentally lead some to believe that most other markets are performing better. While Brazil expects continued expansion and a presumably healthy 2019, its rosy outlook is unique.

Japan saw a modest decline in registrations (just 0.3 percent) through the first half of the year, while Russia recorded slippage of 2.4 percent. But figures from India were far worse. In fact, the country is looking at the biggest sales slump in almost twenty years. Early estimates suggest passenger vehicle registrations may have plunged as much as 30 percent in July, after falling 17.5 percent just a month earlier. Most annual outlooks forecast a double-digit decline in overall sales.

According to Reuters, some of India’s problems stem from the same stringent emission rules that are currently crippling the Chinese auto market, but it’s not the only element.

From Reuters:

Prime Minister Narendra Modi’s 2016 ban on high-value bank notes, higher tax rates under a new goods and services tax regime, a boom of ride-sharing firms such as Uber and Ola, and a weak rural economy have all played a role.

But many dealers and automakers agree it is a deepening liquidity crunch among India’s shadow banks that has been the biggest single factor in an auto sales collapse, which some fear may lead to more than a million job losses.

Unregulated shadow banks, or non-banking finance companies (NBFCs), helped get India’s vehicle market off the ground — accounting for over 60 percent of commercial auto lending, 30 percent of passenger cars, and the vast majority of motorcycle/scooters. They’re also pretty deep in the housing market. Unfortunately, NBFCs are starting to run out of money as they’re not really designed to carry the burden of long-term loans. Last year, many began fearing this would develop into a full-blown crisis and NBFCs lost financial support when they needed it most. Some of the biggest even closed shop.

Not only did this really screw over the automotive sector, it made traditional banks even more hesitant to get involved, further exacerbating the issue. Those that did step in weren’t always willing to extend loans to the same types of customers shadow banks felt okay doing business with.

“There is an imminent crisis in the non-banking financial companies sector,” Injeti Srinivas, India’s corporate affairs secretary, told reporters last May. “There is a credit squeeze, over-leveraging, excessive concentration, and massive mismatch between assets and liabilities, coupled with some misadventures by some very large entities, which is a perfect recipe for disaster.”

The Federation of Automobile Dealers Association (FADA) estimates that nearly 300 Indian dealerships have shut down over the last 18 months as rising inventory management costs made operations untenable. Meanwhile, manufacturers are cutting shifts or temporarily closing plants to stabilize rising inventories:

According to the latest FADA data, average passenger vehicle inventories held by dealers range from 30-35 days, while those of two wheelers stand at 60-65 days, suggesting a moderation in inventory levels for the two key segments from May. The inventory of commercial vehicles, however, rose to 55-60 days versus the previous month.

Industry sources, however, said passenger vehicle and two-wheeler inventories have not actually dropped uniformly across geographies and several dealers continue to hold much higher stock.

“We are asking dealers to maintain an inventory of 21 days, which is almost half of the current levels,” said Ashish Kale, president of FADA.

At least four dealers from different brands said, however, there was little scope to reduce inventories as automakers were pushing them to buy stock despite there being no demand even with heavy discounting and other sops on offer.

While 70-75 [percent] of car sales were previously financed in-house by NBFC or bank agents sitting at a dealership, that has fallen to about 50 [percent], say dealers, as buyers struggle to qualify under more stringent lending norms put in place by lenders that are under pressure to shore up their books.

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