In reverse gear

Published : Mar 13, 2009 00:00 IST

THE automotive sector in India, which in recent years was on the fast track, has been suddenly forced to apply the brakes. The steep fall in the sales of vehicles and components and the decline in exports have made major automobile players decide to put on hold new projects, downsize production and impose job cuts.

The setback is not unusual given the cyclical nature of the industry. But experts point out that this time the auto sector has to experience an extraordinary situation caused by a double-wagon effect of the global financial meltdown and the resultant slowdown in the Indian economy. They predict that it may take 12-18 months to set the industry back on track. For the auto sector in India, the global crisis has turned out to be a financial tsunami.

This has come about at a time when India was beginning to emerge as a major manufacturing base for automobiles. Seven of the worlds largest auto companies such as Hyundai, Ford and Toyota had signed memorandums of understanding (MoUs) with the State governments in the three major auto corridors in the country: the National Capital Region in the north, Maharashtra in the west, and Tamil Nadu and Karnataka in the south.

Now the recession has badly jolted the industry, which was described by the government as the countrys sunrise sector. The Automotive Mission Plan (AMP), launched by Prime Minister Manmohan Singh in January 2007, had envisaged making the auto sector a $145 billion industry; it was expected to create employment for 25 million people by 2016. The document, jointly prepared by the industry and the government, also anticipated an additional investment of about $40 billion, apart from huge investments downstream.

But things have changed drastically. In December 2008, domestic sales declined by 18.2 per cent, forcing the industry to switch to reverse gear. Data released by the Society of Indian Automobile Manufacturers (SIAM) indicate that the sale of commercial vehicles declined by 58.28 per cent, from 42,961 units in 2007 to 17,920 units in 2008. As for other categories, the sale of passenger cars fell by 7 per cent, of heavy and medium vehicles by 71.1 per cent, of light vehicles by 41.9 per cent, and of two-wheelers by 15.4 per cent. As against 7,30,603 vehicles sold in December 2007, only 5,97,622 could be sold in December 2008.

According to Fitch Ratings, an international credit rating agency, domestic commercial vehicle sales in the country declined by 9.5 per cent from April to November 2008. The report, released on January 27, also says that expectations of a sector recovery from the second half of the calendar year 2008 were delayed owing to various macroeconomic factors, including tight liquidity and credit availability, slower Gross Domestic Product (GDP) and industrial production growth rates and depressed investment/consumer sentiment. The report predicts that these key factors are unlikely to improve in the next term.

The only solace for the automotive industry is that there appears to be a big opportunity for after-market business, experts say.

Venu Srinivasan, chairman and managing director of TVS Motors, Chennai, said that the industrys performance was particularly bad in November-December 2008. He said, It would be unrealistic to expect India to achieve positive growth all of a sudden. I expect the country to start picking up by April or September 2010.

The auto component industry has also expressed concern about its growth prospects in the immediate future. The Automotive Component Manufacturers Association (ACMA) has said that the crippling liquidity crunch in the domestic market has slowed down demand, especially that for commercial vehicles. Another reason for the crisis, according to it, is delayed payments from the manufacturers of original equipment to vendors and the deferring of disbursement of loans already approved by banks.

The seriousness of the crisis can be gauged by the situation in the auto sector in Tamil Nadu, particularly Chennai, which has been described the Detroit of India.

The pride of place occupied by the industry in the States economy was highlighted in the Eleventh Five Year Plan, Tamil Nadu (2007-2012), prepared by the State Planning Commission. By contributing 8 per cent to the State GDP and by giving direct employment to 2.2 lakh people through more than 100 companies, the automobile and auto ancillary industries play a crucial role in the State economy, it says.

The Plan document also speaks of Tamil Nadus contribution to the sector. The State accounts for 21 per cent of the passenger cars, 33 per cent of the commercial vehicles and 35 per cent of the automobile components manufactured in the country.

There is no gainsaying that the mood in the State was upbeat until August 2008. As of August 3, 2008, the automobile sector, with an investment of Rs.10,220 crore, topped the MoU list of 1,153 live projects under implementation in the State at a total cost of Rs.4,01,712 crore.

However, by September 2008 the ride became bumpy. The global economic crisis made the auto majors in the State revaluate their projects. The power crisis in the State also added to the woes of the auto sector.

While the existing companies have reduced production, those who have not yet invested are reviewing the need to invest or not. Uncertainty is very great. This is largely an imported problem, not an Indian one, Venu Srinivasan points out.

He also referred to the major role played by vehicle finance and reports relating to fresh guidelines to be issued by the Reserve Bank of India regarding repossession of vehicles in order to revive the auto sector.

Trade unions allege that the unprecedented crisis in the automotive sector has resulted in large-scale displacement of workers, particularly trainees, casual labourers and contract workers. Almost all major players such as Ashok Leyland, Tata Motors, Hyundai and Lucas-TVS have rescheduled their working days. A.K. Padmanabhan, national secretary of the Centre of Indian Trade Unions (CITU), said that most vehicle manufacturing and auto component units had curtailed working days to three a week while some others had reduced the number of shifts from three to two.

Various options are being tried by the managements. Some managements, such as that of the Ennore Foundries, have declared layoff, while some others have decided to adjust the non-working days against the earned leave of the workmen. A few other industries, such as Ashok Leyland, have decided to ask their workers to attend duty on holidays after the return of normalcy in the industry. As many as 50,000 workers are affected by such decisions, Padmanabhan said.

T.M. Jawaharlal, the secretary of the Employers Federation of South India, said that the managements and employees of the automobile and auto component units in the commercial vehicle segment had been evolving a strategy jointly to reduce the number of working days, besides finalising the modalities of the compensation to be provided to workers.

A. Soundararajan, the general secretary of the Tamil Nadu unit of the CITU, said that some of the major players had suggested that the number of non-working days could be adjusted against the employees earned leave; they also wanted workers to work on Sundays after a return of normalcy. He cautioned against shifting the burden of the crisis to the workers.

C.K. Mohan, the vice-president of the Tamil Nadu Small and Tiny Industries Association (TANSTIA), said that several hundreds of auto component units in the tier-II and tier-III sectors in the clusters located in and around Chennai, Coimbatore and Hosur bore the brunt of the slowdown. Besides recession, factors such as power shortage and delay in payments from the major players and disbursement of bank loans had afflicted these units.

Opinions differ over bailout packages. Trade unions have called for government intervention to compensate workers who have lost their jobs and to ensure that the managements did not retrench them on the grounds of a financial crisis. Small and tiny industries demanded reduction in interest rates on a par with the interest on housing loans, relaxation of non-performing assets (NPA) norms, procurement of 50 per cent of the components by public sector undertakings, and ensuring that there was no delayed payment by the major players.

The major players have suggested that the government, instead of announcing a bailout package, should take immediate steps to improve infrastructure and power supply with a view to encouraging investments.

Both the industry and the trade unions admit that the road ahead is going to be rocky.

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