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Automobiles: A year of high volume growth despite disruptions

A brief recap of what moved the automobile sector in the financial year gone by Inventory offloading prior to BS-IV
The financial year 2018 (FY18) started off with a mandatory, nationwide implementation of BS-IV (Bharat Stage-IV) (w.e.f Apr 1, 2017) which required automakers to comply with cleaner emission norms. In order to dispose of unsold BS-III inventory (estimated at 8.23 lakh by SIAM), original equipment manufacturers (OEMs) resorted to various options, such as offering huge discounts in the last few days of March. Unsold vehicles, meanwhile, were exported to markets which still complied with older (BS-III) norms.

Implementation of the Goods and Services Tax (GST)
The next important disruption was the implementation of the Goods and Services Tax (GST) from July 1, 2017, which proposed to subsume several central and state taxes into a single tax. Automobiles were categorized in the highest tax slab of 28% with varying levels of cess depending on the type of vehicle. However, this tax rate was still effectively lower than what they were paying earlier. Considering this, OEMs passed on the benefits of the comparatively lower tax rate to customers by cutting prices across vehicle categories.

Budget tries to “knock-down” imports
In the Union Budget for FY19, customs duty on completely knocked-down imports of vehicles was raised from 10% to 15% and on completely built units from 20% to 25%. This was intended to benefit the “Make in India” program. On the contrary, the government lowered custom duty on imported motorcycles from 75% to 50% fearing retaliation from the US.

Electric Vehicles (EVs): The biggest headline generator
Electrification of India’s fleet was the most talked about feature in the automobile space in FY18. The government, after putting a CY2030 deadline for electrification of vehicles, diluted its stance by saying that an “action plan will be put in place instead of EV policy”. Tata Motors, M&M, Hyundai, Renault, TVS, and HMSI showcased several EVs in the recently concluded Auto Expo 2018. However, barring buses, most other vehicles were just concepts or had their release dates more than a year from now. Automakers have already invested or outlined significant amounts of CapEx over the next 2-3 years towards EV development (M&M: Rs900cr; Ashok Leyland: Rs100cr; MSIL: Rs1,000cr+; Hero MotoCorp: Rs200cr, etc.)

Regulations lend a helping hand
Among other things, the demand for automobiles remained buoyant due to the dynamic regulatory environment. Truck overloading norms got stricter during the year, thus benefitting CV-makers. The government reworked the vehicle scrappage policy w.e.f. April 1, 2020, (coinciding with BS-VI implementation) to offer benefits for scrapping vehicles older than 20 years (as opposed to 15 years earlier). This would result in lesser-than-expected benefits for the CV industry, with expected replacement demand of 50,000 vehicles (Source: CRISIL) against 2.8cr vehicles (Ministry estimates).

The price hike has taken
Nearly all automakers have announced price hikes w.e.f. January 1 or April 1, 2018, to offset the impact of higher input and regulatory costs. The current favorable demand environment permits the same.

Aggressive bidding for SRTU tenders
Tata Motors, Goldstone BYD, and Ashok Leyland emerged winners for e-bus (State Road Transport Undertaking-SRTU) supplies in 10 cities and bagged contracts for 190, 290, and 40 e-buses, respectively. Other players such as M&M, JBM Solaris, and VECV stayed out of the bidding process, quoting irrational pricing as the reason.

Strong demand environment brings cheer
On the volume front, the year-to-date period of FY18 (11MFY18) has seen strong volume growth across all vehicle segments despite the disruptive events witnessed during the year. Overall domestic sales were up 14% yoy in 11MFY18 led by 3Ws (20% yoy), CVs (19% yoy), and 2Ws (15% yoy). PV sales, meanwhile, were only 8% higher yoy. 3W growth was led by the opening of new permits or abolition of permit requirement in key Indian cities. CVs benefitted from e-commerce demand, streamlining of warehouses post-GST implementation, and restrictions on truck overloading. 2Ws were led by growing demand for scooters, which have outpaced motorcycle growth in 10 of the past 12 months.