Global Automobile Industry and the Future Outlook
“It is hard to escape the influence of the automobile industry in the global economy. The impact of the auto market goes deep, with long supply chains and large consumption of raw materials like steel, iron, aluminium, plastic, glass, carpeting, textiles, computer chips, rubber and much more. In factuality, the automobile industry is home to millions of jobs. The automobile industry is a major consumer of commodities. To know more about the global automobile industry, read on…”
According to statistics, about half of the world consumption of oil, rubber, about 1/4 of the glass output, and 1/6 of the steel output is accounted for by the automobile industry. In the economy of developed countries, growth in the automotive industry by 1% causes a GDP growth of 1.5%. The indirect impact of the automotive industry on GDP is strengthened through related industries, provided by orders from the automotive industry. The chart stated under (based on IMF Data) reflects the contribution of automobile industry to the various sectors:
Contribution of Commodities to Global Vehicle Industry Production (% of overall Production)
Before starting with the causes of the slowdown in Automobile Sector, let us emphasise on the contribution of Automobile sector to GDP and Employment globally:
| S. No | Country | Contribution to GDP | Remarks on Employment |
|---|---|---|---|
| 1 | USA | 3-3.5% to Overall GDP (As per Centre for Automotive Research) | The industry directly employs over 0.87 Million People and Indirectly employs 7.2 Million People |
| 2. | India | 7.5% to Overall GDP & 49% of manufacturing GDP. | The Indian Automobile sector employs 37 million people directly and indirectly. |
| 3. | China | 5% of Overall GDP | The total number of civilian passenger vehicles owned in China increased from 17.35 million to 123.27 million from 2004 to 2014 |
| 4. | Germany | 5% of Overall GDP. | The industry directly employs over 0.81 Million People and Indirectly employs 1.8 Million People. |
| 5. | Japan | 5.6% of Overall GDP | The industry directly employs over 0.803 Million People and Indirectly employs 5.5 Million People. |
| 6. | South Korea | 4% of Overall GDP | The industry directly employs over 0.32 Million People and Indirectly employs 1.83 Million People. |
Source: As per International Organisation of Automobile Manufacturers
It is always believed that like MACD indicators (where the early rally or plunge in stock is estimated as a lead indicator), Automobile sector growth or slump has worked as a lead indicator of growth and slump in the economy.
From global statistics, it is visible that the Automobiles sales numbers peaked in the first quarter of 2007 and the second quarter reflected as a lead indicator of the slump in the economy. Similarly, in mid of 2017, sales were at peak. Thanks to China which safeguarded the numbers from 2010 to 2017. From mid of 2017, a sharp downfall is visible in the charts which indicated the slump in economies. However, the market got stretched longer till the end of December 2019. The production statistics for 2019 with YOY % increase or decrease is as under:
| Country | Cars | Commercial vehicles | Total | % change |
|---|---|---|---|---|
| China | 2,13,60,193 | 43,60,472 | 2,57,20,665 | -7.5% |
| Germany | 46,61,328 | 0 | 46,61,328 | -9% |
| India | 36,23,335 | 8,92,682 | 45,16,017 | -12.2% |
| Japan | 83,28,756 | 13,55,542 | 96,84,298 | -0.5% |
| South Korea | 36,12,587 | 3,38,030 | 39,50,617 | -1.9% |
| USA | 25,12,780 | 83,67,239 | 1,08,80,019 | -3.7% |
Source: As per International Organisation of Automobile Manufacturers
Main Causes of Slump in Sales of Automobiles Globally
(1) Plunging Demand
Trade tensions between the US and China since 2018 shacked confidence of China. Although the Chinese economy was slowing down but the trade tensions accentuated it. Some of the big giants reported poor performance since 2018 on account of poor Chinese demand. Similarly, Ford had also pulled plans to sell a Chinese made Ford Vehicle in the US due to the impact of Trade Tariffs. Further due to Brexit, investment in UK Car industry has fallen massively as British car plants rely heavily on components imported from the EU, while most of the cars produced are exported to the European mainland. Due to no deal, Brexit in previous years resulted in a massive plunge in demand on account of uncertainties in the form of tariffs.
(2) Emission Issues & Taxation Concern
In Europe, air quality and Taxation changes have led to the big slump in diesel sales resulted in a substantial plunge in new car registration in Europe since 2018. Introduction of new CO2 emission standards makes it much more expensive to manufacture a car. From 2021 manufacturers will face big fines in the European Union if their fleet break agreed emissions limit. It is believed that carmakers will have to add on an average 1000 Euro to comply with those standards. This has shaken the confidence of the consumer to buy cars in Europe. Further, the tax hike in Japan has also resulted in a decline in sales of Auto sales after three years.
(3) Shift of Ownership
The emergence of technologies like Ola, Uber, Meru, etc has radically changed the mindset of users from owning a car to taking car on rent with a reasonable rate. The cost of travel per mile has slashed due to the emergence of such a model which made ownership of car less appealing. The traditional car companies are fighting to stay relevant as technology giants Waymo dive into this market. These models appeared as a boon to the industry when massive demand was created by these unicorns. But after a certain time, it has resulted into a bane for the automobile industry. Further, if driverless cars go mainstream over the next few years then many people will opt to share or rent rather than owning a vehicle. The fear of such model has forced companies like Ford or Volkswagen to investigate ways on electric and autonomous vehicles. Similarly, Honda invested US$ 2.75 Billion in rival General Motors driverless unit with a view to launching a fleet of unmanned taxis.
(4) Headwinds from China
The Chinese Auto sales saw 20 consecutive months on month decline. China’s deleveraging program has tightened credit for prospective buyers, and a slowing economy has hurt consumer sentiments. The Central Government subsidies for Electric Vehicles were slashed by 45% to 60% and subsidies for Electric vehicles with a range of less than 250 miles were eliminated altogether. Further for clean Blue-sky policies, the new emission regulations i.e. China 6 standards kicked in from 01.07.2019. This has resulted into an increase in the cost of vehicles resulting in lower sales. As pointed in point no. (1), the trade war was having a significant adverse impact on consumer sentiments and was one of the key reasons for plunging automobile sales.
(5) Electric Vehicle Dilemma
In order to reduce the level of emission, the automobile industry is making a shift from the legacy of the fuel-based vehicle to an electric vehicle. The industry is going to sell more electric vehicle, but there are many obstacles in the way. Global sales of battery based electric cars surged to peak at 1.3 Million units registering massive 73% growth in 2018 but it’s just a fraction of overall 86 Millions car sold in 2018. Now, this graph is declining and electric car sales are reducing. But with the introduction of this electric vehicle concept, the intended buyers are in real dilemma of owning a car. On one side they intend to buy those electric cars but refrain themselves on account of cost. On other side, they don’t see value in buying those fuel-based cars.
(6) COVID 19 Impact
As the COVID-19 crisis drags on, the pandemic’s economic impact is very much visible on the vulnerable automobile industry. The automotive sector is among the industries, most exposed to the negative impact of the virus. Previously due to prolonged lockdown in china, Chinese production suffered a significant hit which has resulted in production outages to many manufacturers around the world who rely on Chinese parts. And now with an extended lockdown globally (Excluding China), the automobile industry in China is also suffering from lack of global demand. China is among the world’s largest suppliers of car parts, exporting motor vehicle parts and accessories worth US$ 34.8 billion in 2018, according to the UN’s Comtrade database:
Chinese Exports of Motor Vehicle Parts and Accessories (Total US$ 34.8 Billion)
• United States: US$ 11.7 Billion | • Japan: US$ 3.2 Billion | • Mexico: US$ 2.0 Billion | • Germany: US$ 1.7 Billion | • South Korea: US$ 1.2 Billion
Further with lack of sales from Global market due to lockdown, the major giants like Ford Motors, Tata Motors etc will see a massive downgrade in ratings which will result in expensive borrowing costs. With a lack of cash flows on account of negligible sale will result in a risk of going concern for these companies.
Scenario of the Indian Automobile Industry & Cost of Ownership (2012–2019)
The industry is one of India’s biggest, considering it employs some 35 million people, directly or indirectly, and contributes more than 7% to the country’s GDP. Before telling the real scenario of the Indian Automobile Industry, we must emphasise on change in cost per KM from 2012 to 2019 from the following comprehensive financial data:
| Particulars | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Diesel | Petrol | Diesel | Petrol | Diesel | Petrol | Diesel | Petrol | Diesel | Petrol | Diesel | Petrol | Diesel | Petrol | Diesel | Petrol | |
| Car Cost (Swift Dzire) | 5,80,000 | 4,79,000 | — One-time initial cost — | - | - | |||||||||||
| Parking Charges (Delhi Flat) | 3,00,000 | 3,00,000 | — Purchase once paid forever — | |||||||||||||
| Principal Repayment | 61,337 | 50,610 | 67,494 | 55,633 | 74,193 | 61,154 | 81,557 | 67,224 | 89,651 | 73,896 | 98,548 | 81,230 | 1,07,220 | 89,253 | - | - |
| Insurance | 10,271 | 8,482 | 9,757 | 8,058 | 9,269 | 7,655 | 8,806 | 7,272 | 8,365 | 6,909 | 7,947 | 6,563 | 7,550 | 6,235 | 7,172 | 5,923 |
| Maintenance Cost (Service) | 20,000 | 10,000 | 22,000 | 11,000 | 24,200 | 12,100 | 26,620 | 13,310 | 29,282 | 14,641 | 32,210 | 16,105 | 35,431 | 17,716 | 38,974 | 19,487 |
| Depreciation (15% WDV) | 87,000 | 71,850 | 73,950 | 61,073 | 62,858 | 51,912 | 53,429 | 44,125 | 45,415 | 38,602 | 38,602 | 32,812 | 32,812 | 27,890 | 27,890 | 23,707 |
| Fuel Running Cost (20 KM/day) | 19,130 | 36,316 | 22,411 | 40,152 | 27,837 | 37,696 | 23,839 | 38,478 | 29,276 | 39,237 | 33,569 | 46,631 | 39,970 | 56,098 | 39,634 | 51,669 |
| Parking Depreciation (10% WDV) | 30,000 | 30,000 | 27,000 | 27,000 | 24,300 | 24,300 | 21,870 | 21,870 | 19,683 | 19,683 | 17,715 | 17,715 | 15,943 | 15,943 | 14,349 | 14,349 |
| Registration Charges | 23,950 | 29,000 | - | - | - | - | - | - | - | - | - | - | - | - | - | - |
| Loan Interest (9.5% reducible) | 52,489 | 43,350 | 46,398 | 38,327 | 39,699 | 32,806 | 32,335 | 26,736 | 24,241 | 20,064 | 15,344 | 12,730 | 5,563 | - | - | - |
| Penalty (Violation Fines) | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 4,000 | 4,000 |
| Total Cost per Year (Rs.) | 3,05,177 | 2,80,608 | 2,70,011 | 2,42,242 | 2,63,356 | 2,28,623 | 2,49,456 | 2,20,015 | 2,46,913 | 2,14,032 | 2,44,935 | 2,14,786 | 2,45,489 | 2,14,135 | 1,32,020 | 1,19,135 |
| Running Cost per KM (Rs.) | 31 | 28 | 27 | 24 | 26 | 23 | 25 | 22 | 25 | 21 | 24 | 21 | 25 | 21 | 13 | 12 |
Assumptions:
- (a) Total Distance Travelled is 1000 KM per month (or baseline travel parameter).
- (b) Registration Charges: 5% of Cost for Diesel and 4% of cost for Petrol Car.
- (c) Insurance: 1.97% of 20% depreciated Value & 12.36% Service Tax / 18% GST.
- (d) Car Mileage Average: In second year the decrease in average is 3% and in subsequent years the average decrease is 5% on reducing value basis.
- (e) Fuel Prices: Taken on average basis considering stability of rates.
From the above data, if we own petrol or diesel vehicle in India on a loan basis, the cost of ownership per km for 8 years is Rs. 24 per Km for Diesel car and Rs. 22 per Km for Petrol car which is relative in terms of number of KM you drive your car.
Further thanks to the ambitious infrastructure spending which Central Government undertook on account of reduced crude prices and hiked taxes. This helped them to float huge infrastructure tender year on year basis. The debt of NHAI inflated from Rs. 44,567 crore in 2016 to Rs. 1,78,867 crore in 2019. The major portion of this debt is attributed to land acquisition. This, in turn, resulted in sweet fruits to automobile industries too. Small chunk of the amount received from compulsory land acquisition resulted in buying of premium cars or small segment cars depending on the amount of premium received in Tier 2 and Tier 3 Cities. Further enhanced portion of compensation further helped automobile industries to get demand from Tier 2 and Tier 3 Cities.
Like Uber buying 2,00,000 cars from Maruti with a whopping investment of Rs. 2,600 crore. The model is debt-based but the same helped the industry with the huge spurt in demand. However, post capex of these ride-hailing industry or delivery distribution companies and spurt in crude cost (which resulted in decline floating of Infrastructure project) resulted in a decline in demand from Tier 2 and Tier 3 cities. The Tier 1 cities demand was already declining for many years and post Ola and Uber the dilemma of people completely shifted from owning a car to taking car on rent.
Further with the introduction of BSVI emission norms, the industry is forced to do capex of multibillion to comply with the norms.
Now, What Changed the Mindset of Owning a Car in India?
As discussed about the ride-hailing technology along with BS VI emission norms and EV vehicles have confused the intended buyers to refrain from owning a car. The cost impact on the industry will be huge considering the capex done for BSVI. This increase cost burden will ultimately be passed on to the customers which will make the vehicles more expensive. If the customer opts for BSIV then the fear of judicial pronouncement with respect to life of the vehicle can give setback to intended users. Whatever Government announce measure to liquidate BSIV vehicles, it will not help to boost the confidence of intended buyers.
Therefore, we see the automotive industry declined for the 17th month in a row in March (Leaving Festive season which is not comparable). By some estimates, more than 100,000 workers, many of them contractual, have lost their jobs so far. Now post corona, fears are rising that forced lower production resulting in more job cuts in the upcoming month.
Future Outlook
Before the Corona crisis, the global automobiles saw a sharp slump in sales. In fact, there were many instances where production halts were visible in September or October for a few days. E.g. Ashok Leyland halting its production. Since the sector was heading for major slowdown since last years, so after Corona crisis the situation will further deteriorate. Even during corona crisis, we have seen companies like Hero Moto to defer the payments to vendors or giving OEMs (Original Equipment Manufacturers) to get payment from Banks on Letter of Credit (LC) basis. If debt ridden OEM opts for such option then the margins will further shrink resulting insolvency position. Further dealers of automobile will vanish if such crisis continues for a longer period as the working capital of these dealers will cause a huge dent in their margins.
The ratings of debt-ridden OEMs globally will get revised to lower resulting in expensive cost of funding. Same will be applicable to main auto companies. In recent times we have seen downgrading of ratings of Tata Motors or Ford Motors. This scenario is very precarious and can result in the collapse of big giants.
At last, we can conclude that the current scenario is not at all favourable for the industry considering the domino effect of disruption in supply chain and the automobile industry needs some magic stick to get back on track. If the demand is not revived in coming months (which is likely scenario) then we can see accumulation of inventory with these companies and dealers with no real buyer. This will be an avalanche for the industries connected directly or indirectly with the automobile sector.
The automobile sector stands at a critical historical crossroads — caught between the headwinds of BS-VI transitions, EV dilemmas, ride-hailing proliferation, and pandemic supply chain shocks. Only deep financial restructuring and targeted stimulus can avert an avalanche across interconnected global industries.