Firm Recovery Still Eluding Auto Market

Dear Friends,

There have been signs of passenger vehicles witnessing a shade uptick in sales, piggybacking on the improved sentiment in the wake of formation of a stable, decisive Government at the Centre. However, commercial vehicles continue to reel under slowdown blues. It means that the economy is yet to gain traction, while there are tell-tale signs of improvement in confidence level. Macro-economic data emerging of late also supports the view that the worst is perhaps behind us.

In the clearest signal yet that economic activity is picking up, India’s core sectors grew at 7.3% in June 2014 – a 9-month high. This heartening news comes on the top of the positive growth momentum exhibited by the factory output in April and May 2014.

Activity in the eight core sectors - coal, crude oil, natural gas, petroleum refinery products, fertilizers, steel, cement and electricity – are considered as vital cog in economic growth. IIP growth at lower-than-expected 3.4% during June 2014 despite impressive performance of core sector, however, comes as a dampener. 

Another piece of good news is that the HSBC India Manufacturing Purchasing Managers' Index (PMI), a measure of factory production, rose to 53.0 in July, up from 51.5 in June, pointing to a solid improvement in business climate. The buoyancy in exports since April 2014 on the back of slowly improving world economy has also aided a surge in activity, pushing the manufacturing PMI to a 17-month high.

At the same time, striking a quick word of caution, the experts warn that input price pressures have risen sharply and supply side constraints still limit the pace with which growth can recover without stoking inflation.

Retail inflation in June touched its lowest mark at 7.31% since January 2012 and wholesale price-based index slid to four-month low of 5.43%. However, the scourge of inflation has, in no time, come back to haunt the country with CPI for the month of July 2014 shooting up to 7.96% mainly because of the food inflation. RBI, in its third bi-monthly monetary policy review for the year 2014-15, kept the key policy rates, namely, Repo Rate and CRR unchanged at 8.0% and 4.0%, citing inflation worries. Arguing against the lowering of key policy rates, RBI cautioned that the moderation in CPI headline inflation for two consecutive months, despite the seasonal firming up of prices of fruits and vegetables since March, was due to the base effect and the steady deceleration in CPI inflation excluding food and fuel. 

Food inflation, particularly in the context of erratic monsoon this year, remains a major worry. While the monsoon has revived and the rains have progressively improved, reducing the rain deficit to 17.0% and alleviating the concerns over the impending drought, the rain deficiency in States like Punjab and Haryana – the food bowls of India – is still hovering at 50%. The think-tanks, including RBI, feel that the battle against inflation is not over as yet.

The impact of unseasonal rains in February and March and the erratic monsoon is there for all to see. Spike in food inflation apart, India's tractor market, which grew more than 20% last fiscal year when most of the automotive sector was on a downhill drive, is facing some rough weather. In India where 60% of farmland is rain-fed, rains as well as their timing and distribution have a direct impact on farm output and farmers' income. Purchase of farm equipment and consumer durables increases in the years when the country gets good showers - especially during the monsoon that brings 70% of the annual rains.

However, benign international crude and commodity prices, despite geo-political turmoil in middle-east, coupled with a modicum of stability exhibited by Rupee in foreign exchange market, is encouraging.

Another encouraging development is that the new Government has set about the task of reforms in labour laws in right earnest, with a view to giving impetus to the industrial activity and improving the investment climate in India. Liberalising and speeding up environmental clearances for various projects, stuck in logjam for years, is also refreshing. The firming up of export growth should support manufacturing and service sector activity, thereby, helping the revival of economic growth and automotive market.

As regards auto retail business scenario, the recent unsavoury reports of the increasing stress in OEM-dealer relations are disturbing, to say the least. 

As the Indian market grows and matures, the customer expectations also increase. As a result, the consumer cases/disputes are also likely to register a sharp increase.  Being the face of manufacturer for the customer, it is largely the dealer, who has to bear the brunt of customer wrath in case of a gap, perceived or actual, between the quality of product & service and the customer expectation. At times, out of souring manufacturer-dealer relations or otherwise, supplies of vehicles and parts are suddenly stopped, leaving the dealers and customers in the lurch.  

Secondly, auto market in India has been going through an acute slowdown for over two years. The intense competition in the market has led to the strain in OEM-dealer relations, culminating in termination of dealerships in quite a few cases. With OEM-dealer agreements heavily loaded in favour of OEMs, such  abrupt and, at times, arbitrary termination of dealerships has not only caused huge loss to the automobile dealerships, but has also left a humungous amount of bitterness in its trail.

Thirdly, as the competition intensifies further, some of my fellow automobile dealers might not be able to cope with the complexities and changing dynamics and, therefore, may not like to continue in the business. In another scenario, manufacturers may not like to continue with the dealers who are not able to keep pace with the company’s plans, targets and expectations.  

Therefore, there is a pressing need to enact auto franchise laws in India as in the US, or to otherwise regulate the relationship, rights and obligations among the manufacturers, dealers and their customers.

In the interest of equity and fair play, the manufacturer should ensure to give adequate reasons and notice for the termination of any automobile dealership; the OEM should take back the inventory or help sell the assets and inventory to some other dealers on cost+ basis before termination of any dealership; or the dealer should be allowed to transfer his dealership and its assets, as a going concern, to another person, subject to the guidelines that may be laid down.

This will avoid: (i) Colossal waste of money and resources spent in creating dealership & workshop infrastructure and stock-in-trade; and (ii) disputes and litigation, that currently arise in case of termination of relationship.

With a combined turnover of around Rs. 4,00,000 crore, auto retail business is 3 times the size of rest of organised retail. The unfortunate part is that while rest of the organised retail steals the attention of the Government, politicians and the media alike and hogs headlines with unfailing regularity, auto retail segment hardly gets the attention it deserves and has no nodal ministry in the Central Government to address its concerns.

We were encouraged when Mr Praful Patel, the then Union Minister of Heavy Industries & PE, addressing us as our Chief Guest at FADA’s 8th Auto Summit on 7th February 2014 at New Delhi, mentioned that a mechanism to address the concerns of automobile retail trade and service industry was under active consideration in his Ministry.

We, therefore, submit to his successor – Mr Anant Geete that the proposed mechanism for redressal of concerns of automobile dealers may be given a concrete shape at the earliest.

With best wishes,

Yours sincerely,

Mohan Himatsingka

 

 

 

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