Boom to bust: Gloom grips India's auto industry amid unprecedented slump

It’s hard to escape the influence of the auto industry in Chennai, a city in southern India known as the nation’s Detroit. Schoolyards have billboards proclaiming they’re “supported by” big carmakers such as Daimler, Renault, and Nissan Motor. Even the public toilets in a nearby slum are sponsored by the country’s largest tiremaker.

With a rising middle class and rapid urbanization, this should be boom times for the country’s automotive industry, the fourth-largest in the world. Car density—measured by the number of passenger cars per 1,000 people—was only 27 last year, vs. 145 in China and 570 in Germany, according to Fitch Ratings. That leaves huge potential for growth. McKinsey & Co. projected in 2018 that India could overtake Japan as the No. 3 car market by 2021.

Yet the mood in Chennai is one of gloom as an unprecedented slump grips the industry. Passenger car sales have contracted for 10 straight months, plunging to 115,957 units in August, a 41 per cent drop from the previous year—the biggest decline on record. Automakers are cutting investment and production; hundreds of dealerships have shut down. Nationwide, job losses in the sector, which employs more than 32 million people directly and indirectly, have climbed to more than 580,000 in the past 18 months, according to estimates from labor unions and auto dealers.

RC Bhargava, veteran chairman of Suzuki Motor Corp’s Indian unit, Maruti Suzuki—the country’s largest carmaker—describes the situation as “quite bad” and predicts more job losses for the industry. Maruti’s sales have contracted for seven straight months, and the company said this month it will halt production of passenger cars for two days at two of its plants.

At least 60 per cent of contract workers at auto plants in Chennai have lost their jobs in the past few months, according to two labour suppliers who declined to be identified because they still do business with the carmakers. The pain is spreading to other parts of the economy.

Suresh (46) who goes by one name, runs a sidewalk tea stall in front of a Daimler truck plant on the city’s outskirts. His 20-year-old son’s contract job as a machinery maintenance worker at an auto plant wasn’t renewed after 18 months, and the monthly loss of USD 160 to the family’s income stings. “I am left with nothing to pay instalments for my vehicle and to pay for my daughter’s wedding,” he says.

The slump in auto sales can be traced to the distress in rural areas, which are home to 70 per cent of the population. Stagnant incomes there are depressing demand for cars, as well as small-ticket items such as shampoo and biscuits. In cities, the rise of ride-sharing apps like Uber has cut into vehicle sales, while some buyers are deferring purchases until stricter car emission standards are introduced next year.

Then there’s the credit crunch. It began in the banking system five years ago and has now engulfed shadow lenders, the lightly regulated outfits that accounted for almost 4 of every 10 consumer loans in the three years through 2018. One of the largest players, Infrastructure Leasing & Financial Services Ltd., started to default on some of its debt of nearly 1 trillion rupees (USD 14 billion) last year, further aggravating the liquidity squeeze.

India’s car slump is part of a wider downturn in the auto sector that’s hit other big markets, including China, although the decline in India has been particularly dramatic. Consumption is the backbone of the economy, making up about 60 per cent of gross domestic product. So as sales of everything from Maruti Suzuki compacts to gold jewellery have tailed off, so has GDP growth: It dropped to a six-year low of 5 per cent in the three months through June. The unemployment rate is already at a 45-year high of 6.1 per cent, and if the auto industry is any guide, it’s headed higher.

Having secured a second term in a landslide victory in May, Prime Minister Narendra Modi is facing the biggest economic challenge of his six-year tenure. The finance ministry has announced some support measures, such as tax exemptions for buyers of electric cars and lifting a ban on government purchases of vehicles. But those haven’t satisfied the industry, which is calling for a big cut to the 28 per cent goods-and-services tax rate on cars.

Modi’s earlier goal of raising the sector’s contribution to GDP from 7 per cent to 12 per cent by 2026 now looks overly optimistic. “I don’t see any recovery unless the government intervenes and gives out something really big,” says Amit Mehta, managing director of Mehta Automotive, a supplier to Maruti and Hyundai Motor, which has been forced to lay off almost half its workforce at a factory in the northwestern city of Ludhiana. “I don’t see the market coming back this financial year.”