5 Things that Show Auto Slowdown is Real Amid the demand slump, auto giants lay off major workforce & shut down manufacturing plants

In the wake of a prolonged sales slowdown, the Indian auto industry – the world's fourth-largest – is facing an extreme crisis, adversely affecting the lives of those who are directly associated with the sector. With many companies forced to shut down factories for days and axe shifts, automakers, parts manufacturers and dealers have laid off about 3,50,000 workers since April.

At least five companies that have recently cut or plan to cut hundreds of jobs, mainly from their temporary labour force. This slowdown is being regarded by the giants of the auto industry as the worst ever. Here's what you need to know about the auto crisis so far:

Falling Demand

The domestic passenger vehicle industry has recorded its worst performance in the past two decades in July, continuing the downward trend for nearly a year. Sales of commercial vehicles and two-wheelers have also been hit. A series of factors including higher insurance costs, volatile stock markets and a liquidity squeeze in a slowing economy have slammed demand for new vehicles.

Passenger vehicle sales have dropped for nine straight months through July, with some automakers suffering year-on-year declines of more than 30 per cent in recent months. This was the worst decline marked in the last 20 years. The commercial vehicle industry, on the other hand saw a decline of 10.4 per cent YoY in July.

In July, market leader Maruti Suzuki reported a 36.3 per cent drop in its domestic PV wholesalers, while Hyundai saw a dip of 10 per cent. M&M sales were down 16 per cent, Tata Motors PV sales fell 31 per cent while that of Honda Cars India Ltd (HCIL) also came down 48.67 per cent during the month.

Is EV Push the Cause?

The falling car sales have taken the auto sector by storm. Besides an overall slowdown in the economy, the imposition of BS-VI norms - standards instituted by the government to regulate the emission of air pollutants from motor vehicles, from April 2020 – has left the potential buyers confused. While compliance with BS-VI norms will require higher investment in technology, the BS VI-compliant fuel will be more expensive.

The recent push towards electric vehicles has also played an extreme part in reducing the demand for internal combustion engines (ICE) vehicles. In its bid to curb air pollution, the government is likely to adopt an increasingly strict attitude towards vehicles run on ICE in the future. Potential buyers are keen to learn about the feasibility of owning an electric car.

With the ever-increasing interest in EVs by the general public comes a growing understanding of the advantages of EVs over ICE vehicles. As the customers are progressing towards a better future, so should the automakers. NITI Aayog Vice-Chairman Rajiv Kumar recently stressed that instead of seeing EVs as a threat, the auto sector should grab the opportunity to emerge as a global leader.

The government has announced that all the two-wheelers below 150 cc on the road need to be electric post-2025. Kumar, however, doesn't see the vision impacting the sales of cars, tractors and other commercial vehicles.

Loss of Employment

Maruti Suzuki - the country's biggest carmaker has cut its temporary workforce by 6 per cent over the past six months. Japanese motorcycle maker, Yamaha Motor and auto components makers including France's Valeo and Subros have laid off about 1,700 temporary workers in India after a slump in sales. Subros, which is part-owned by Japan's Denso Corp and Suzuki Motor Corp, has laid off 800 workers.

Domestic parts maker Vee Gee Kaushiko has cut 500 people. Reportedly, Yamaha and Valeo last month reduced their workforces by 200 each. Meanwhile, automotive supplier Wheels India could cut its temporary workforce by as much as 800 and has started realigning its shifts. The auto sector employs more than 3.5 crore people, directly and indirectly, accounting for nearly half of manufacturing output.

The jobless rate rose to 7.51 per cent in July 2019 from 5.66 per cent a year earlier, according to private data group CMIE. The layoffs come as the likes of Honda Motor, Tata Motors and Mahindra & Mahindra implement brief suspensions to production in the face of slow demand. Even though the permanent workers didn't lose their jobs, as they sign yearly agreements with the company for job security, temporary workers were brutally affected.

Production Cut

The auto sector, which contributes more than 7 per cent to country's GDP, is facing one of its worst downturns. Tata Motors has had week-long shutdowns at four of its plants in the past two weeks, while Mahindra has said it had 5-13 days without production at various plants between April and June. The crisis has also hit smaller auto parts makers like Jamna Auto Industries Ltd.

The company, whose customers include Tata Motors, General Motors and Toyota Motor, said on Thursday it might shut all its nine plants in August due to weak demand. Auto components manufacturers Bosch Ltd and Wabco India Ltd have already trimmed production amid the demand slump.

A statement from Tata Motors said it has aligned production with demand and adjusted the shifts and temporary workers. Even Jaguar Land Rover (JLR), Tata Motors' luxury car unit is undergoing closure for three days, in an attempt to cut down the volumes of locally assembled models.

Honda has stopped production of some car models at its plant in Rajasthan since July 16 and is halting manufacturing entirely at its second plant in Greater Noida for 15 days from July 26. The company's domestic business said that production management will be critical throughout the year and it is seeking to avoid stock build-up.

Can GST Reduction Help?

To revive the sector, auto executives have demanded tax cuts and easier access to financing for both dealers and consumers from the finance ministry. The industry's plight was highlighted by the Automotive Component Manufacturers Association of India (ACMA), with the trade body's director-general, Vinnie Mehta, saying the sector was experiencing a "recessionary phase.''

Mahindra Group chairman, Anand Mahindra said, "The most obvious and welcome first aid would be some temporary relief on the GST front, either by modifying the slabs or, if that is not possible, by removing the cess". He furthered suggested to re-look at the registration fees which have gone up very substantially and a rollback of the hike in road tax mandated by state governments after the introduction of GST.

Industry association bodies such as Society of Indian Automobile Manufacturers (SIAM), Automotive Component Manufacturers Association and Federation of Automobile Dealers Associations have requested to slash GST rate from 28 to 18 per cent. However, the government is unlikely to go for a GST cut as it fears a fall in revenue collection.