Automobile industry: ‘The average slump in the dealership sector is in double digits’

Interview with Ashish Harsharaj Kale, president of the Federation of Automobile Dealers’ Associations.

Ashish Harsharaj Kale, president of FADA.

The Federation of Automobile Dealers’ Associations (FADA) is the apex national body of the automobile retail industry, representing over 15,000 automobile dealers. It has been flagging the issue of the slowdown in the automobile sector and the piling up of inventories with dealers. Dealership outlets provide direct employment to nearly 2.5 million people.

FADA president Ashish Harsharaj Kale described the near-term outlook as “cautiously optimistic” although consumer sentiment and demand continued to be weak. The overall economic situation, he said, was weak and the transmission of surplus liquidity and interest rate cuts were not visible in retail lending. In an interview to Frontline, Kale talked about the reasons for the slowdown and the way out. Excerpts:

Could you please elaborate on the extent of the slowdown affecting the automobile industry and the possible reasons for it?

There is a slowdown. I wouldn’t call it the worst. The biggest problem is that it hit us suddenly. In 2008-09 [during the global economic recession], we were able to recover from it as the economy was not in a bad condition. It was purely a liquidity crisis then and the government was able to reduce excise duties and asked banks to become aggressive [in lending]. In three to four months, we were back to normal. But today, it is 10 months since the slowdown affected the two-wheeler segment and nine months since it affected the four-wheeler segment. The slowdown in the automobile sector started before the slowdown in the economy, which happened sometime in January. The average slump in the dealership sector is in double digits compared with last year, almost 20-22 per cent in some months and in some segments.

The reasons are manifold. Insurance costs went up by 10-12 per cent, but the hike was rectified later. It dampened consumer confidence to some extent. Bad monsoons last year were another factor. The two-wheeler segment is a sensitive area for the agricultural sector. Last year, 45 per cent of Maharashtra, where I come from, was reeling under severe drought. In October-November, the liquidity crunch hit us with the crisis in IL&FS, which hit the non-banking financial companies [NBFC] industry. Though IL&FS was not involved in the automobile industry, the liquidity in NBFCs started drying up. Then in October-November, fuel prices went up in response to global fuel prices. Many factors came together, weakening consumer sentiment.

Was information about the crisis suppressed as the general election was nearing?

I don’t think so because manufacturers and retailers were declaring their figures hoping someone would take notice. During the election, this went into the background. It was reported that the economy was showing signs of slowing down. Real estate, too, was badly affected. The gravity of the situation increased in the first quarter this year. There were expectations from the new government.

Several automobile majors have laid off workers. Dealer agencies and service centres provide direct employment to several people. What are the prospects for this workforce in view of the trend of lay-offs?

Last year, when there was growth, we recruited people. In the April-August period, we took in youngsters and trained them to become salesmen. When there is a slowdown, variable expenditure will be cut. When the slowdown extended into this year, manpower had to be cut. The last thing a dealer wants to do is to lay off people but I can say that permanent jobs have not been affected. Fresh recruitment has to be “regulated”. We have done an internal assessment. There have been 7-8 per cent job cuts in dealerships though it is not uniform across all States. Two lakh jobs were reduced from April to July. If the slowdown continues, the auto industry has indicated that there will be further lay-offs.

To what extent is government policy responsible for the slowdown?

A lot of safety and environmental regulations have come up in recent times. Insurance costs were raised, as was the pressure to meet Bharat Stage VI emission compliance norms. In some States, the road tax went up, so the overall cost of ownership went up. The other issue was liquidity. Aggressive lending comes only in a “growth” market. In March, everyone was talking about a liquidity crunch. But the government went into election mode. There has to be an aggressive credit environment. We have also requested for a downward revision of goods and services tax rates. We saw that when it was revised last time, the market revived. Today, the GST rates are what they are; but sales are falling down and government revenues are also getting affected. I cannot say that today things are fantastic.