Maruti Suzuki Will Continue To Open Dealerships Despite Auto Slowdown, Says Chairman RC Bhargava
The chairman of India’s largest carmaker believes the current auto slowdown is “very temporary”.
Maruti Suzuki India Ltd. will continue with its plans of expanding its sales network, even as its peers cut back on production and close dealerships, because the current auto slowdown in India is “very temporary”.
That’s according to the carmaker’s Chairman RC Bhargava, who said Maruti Suzuki dealers have adequate financing. “If we once slow down the tempo of creating new dealerships and increasing the sales and service network, it will be very hard to get that back again,” he told BloombergQuint in an interview on Tuesday.
India’s automobile industry is witnessing its worst slowdown in more than a decade with domestic passenger vehicle sales falling 31 percent year-on-year in July, marking the ninth straight month of decline. Automakers and parts suppliers have already started laying off contract workers in the Gurugram-Manesar belt, BloombergQuint’s conversations with employees and union members have revealed. Vehicle makers, including Maruti Suzuki, have cut production over the last few months.
The production cut, however, is only to align inventories to market demand, Bhargava said. “It’s normal management practice to not carry more inventory than you need because carrying inventory adds to cost. It ages the vehicle and customers don’t like buying old vehicles,” he said.
Production must follow the sales.RC Bhargava, Chairman, Maruti Suzuki India
‘Temporary’ Slowdown
Bhargava said the auto slowdown isn’t reflective of underlying problems with the Indian economy. “I don’t think that’s true. I am on the board of an FMCG company, the growth over there was 10 percent,” he said. Moreover, some sectors have grown fairly well, he said, and profit levels across companies have only fallen due to higher interest costs.
“I’m hopeful that by the third or fourth quarter of the year, we will see a revival of growth in the (auto) industry,” Bhargava said.
Automakers are now banking on good monsoon to boost rural demand, the upcoming festive season to increase consumer spend and a combined push from the central and state governments to revive the sector, he said.
Road Tax Trouble
According to Bhargava, the current auto slowdown started off as a normal business slowdown, similar to those in 2008-09 and 2013-14, but got exaggerated due to a rise in ownership costs. He was referring to the added costs of stricter safety features like airbags, anti-lock braking system, crash tests and implementation of a road tax by few states that “runs into tens of thousands of rupees”.
That has not happened ever in the past. When in the business cycle of a slowdown, you suddenly burden the customer with large amounts of cost in owning a car, then I think the situation becomes different.RC Bhargava, Chairman, Maruti Suzuki India
“State governments need to look at the timing of the road tax imposition, and I feel that it might be in the overall interest of the country, the states and the industry if the recent imposition on road tax was rolled back and deferred till a time that the industry recovers,” said the chairman of India’s largest carmaker.
Removing the road tax for now is more critical than lowering the goods and services tax on cars, Bhargava said, amid multiple calls for a GST rate cut on cars to 18 percent.
“The whole question of government taxation has to be reviewed in the context of government revenues also,” he said. “There are compulsions on the government to make some expenditures and if every sector wants a reduction in taxes, then I’m not sure how the government can balance its budget.”
Watch the full conversation with Maruti Suzuki Chairman RC Bhargava here:
Read the full conversation here:
The chat on the street is that the auto-industry is in dire need of some supportive intervention to come in from the government. Is that something that people like you are hoping for to come about any time soon?
We are all hoping that good rains, the coming festive season and some support both from the central and the state governments will take this industry out of the deep recession which is fallen in the last few months. I am hopeful that by the third or fourth quarter of this year, we will see a revival in terms of growth happening in the industry.
Mr. Bhargava, how is this period any different from the slowdowns we witnessed in, say 2008-2009 or 2011-2012 where the government for one, came in and gave some temporary handouts in term of temporary excise duty cards, they nudged the banks to promote a retail lending in a big way. Do you feel that those sorts of measures need to be taken now to make sure that there can at least be a turnaround for the industry in whatever way possible?
The last two slowdowns which we had in 2008-09 and 2013-14 were normal business cycle slowdowns. This slowdown also started as a normal business cycle slowdown, it was no different. But then what happened was that substantial amounts of costs for buying a car were added on to the customer. That had not happened ever in the past. When in the business cycle of a slowdown, you suddenly burden the customer with large amounts of extra costs to keep owning a car, then I think the situation becomes very different. This time it has happened for two major reasons, one which could not have been foreseen which was the implementation of various safety regulations several years ago which came into force this year like, air bags, the ABS, the more stringent crash tests. These added substantially to the costs to the customer this year. Again, state governments, nine of them, in this last few months including up to July, have been adding to the road tax for the customer which has run into tens of thousands of rupees. Similarly, these extra costs have made the whole situation very different from the past.
So, what could improve this? While we’ve been hearing a lot about how the government needs to come in and take GST cuts for it to spur some demand back into the system, do you think that is enough?
The state governments need to look at the timing of the road tax and position. And I feel that it might be in the overall interests of the country, of the states and of the industry. If the recent impositions on road tax were rolled back and deferred for some time till the industry recovered, I think that is what needs to be done. We all keep focusing on GST but the impact of this road tax is something which we need to look at because it is 2 percent, 3 percent even and up to 5 percent of the cost of the vehicle. Along with this, because of the cost of the safety regulations and the cost of BS-VI coming in this year, there is a substantial extra cost which is the cost for the customer and I think that is the main criteria for considering the reduction for a temporary period.
Just wondering, as someone who has seen the business cycles and economic cycles as well, how much of an impact that the economic slowdown do you see this to be? Even if there were some changes made to the tinkering to the tax or otherwise, the economy is so slow that jobs not being created. How will demand come back sir?
No, I don’t see that there is any serious problem with the economy or there is a general slowdown of all sectors, that is not true. I am on the board of a FMCG company, the growth over there was 10 percent. And from what one is reading in the media, some sectors have grown quite well. Yes the profit levels have come down but that’s largely because of large interest costs. Interest costs actually should’ve come down but for some reason they have gone up and that’s one factor.
The whole question of government taxation has to be reviewed in the context of government revenues also. There are compulsions on the government to make some expenditures and if every sector wants a reduction in taxes, then im not sure how the government can balance its budget.
The Question Of Millennial Demand
The other small question Mr. Bhargava and I am sure you’ve been asked this a number of times. We had a conversation with an auto magazine editor, a few days back, and he pointed out a couple of things which he has not seen in the past which might be impacting demand as well. One, he said, he is at a loss to explain the behavior of millennials wherein they don’t want to own assets. Be it cars, be it houses and that will according to him have a demand. The other is the impact of shared mobility which is, when the growth was there, helped demand for companies like you, predominantly at Hyundai. Now that the market seems to be saturated, it is not creating that additional demand. Two very new factors something that we can’t relate to the previous new cycles.
The shared mobility factor is not a major issue. The number of cars that have been bought by the platform operators like Uber and Ola are not a very large number. The number of people of using these is also not very large if you look at the total vehicle population. So while I think shared mobility is something which will keep growing, I don’t think at this point of time it has had any significant impact on the slowdown of demand for the automobile industry. The second question, I am not quite sure if I understood what the question was, but I assume you meant that people are not wanting to own cars now. Is that it?
Yes, the millennials at least.
But I don’t think that is also strictly true. I think the younger generation, the mobile people, they do want to have a car, but they want to have a cleaner car -- a car with all kinds of connectivity so that they feel that they are in tune with the times today. And I think the manufacturers are going in with those kinds of cars and the success of the sales from the Nexa network that we set up was four years ago. So, it is how the generation, the millennia people are actually accepting that kind of a showroom and that kind of services and the kind of vehicles which are being provided there. I don’t think either of these are reasons. I don’t think this is happening anywhere in the world, I don’t think this is going to happen in India either.
People will want to have personal mobility.RC Bhargava, Chairman, Maruti Suzuki India
Festive Hopes
One other factor, just wondering, everybody including biscuit manufacturers, and other FMCG companies too are pinning hopes for a revival in this festive season. Do you foresee that? We were speaking to FADA yesterday and they said that the enquiries have gone up, conversions haven’t happened, but the enquiries have been a lot higher than what they were earlier. Do you foresee that? Would that be a factor of discounts? Discounts are in quarter two and quarter one, can you give us some flavor in the current times?
I don’t think the discounts will lead to sustained sales. Discounts will never lead to sustained sales as you can’t sustain the discount for long. As the festival season is approaching, the rains have had a positive effect on the sentiments of people especially in the rural areas. Enquiries will increase, sales will increase and especially as I said earlier, if measures are taken both by the state and the central government, it will give people the feeling that the government is actually keen on pushing this sector and is giving some incentive.
I must say, at the same time, what has helped is the attitude of the government. They have responded quickly. The banking sector is becoming much more friendly in terms of cutting down on customer things. You saw the state bank’s decision to doing things on a case-to-case basis instead of a blanket restriction on all borrowing. The EV programme has been slowed down according to another newspaper report. All these will help sentiment change in coming months.
Mr. Bhargava, I want to pick that point which you said about the banking space and what they’re doing. You don’t think that at the current point in time, dealer financing has taken a little bit of a hit and because of GST the working capital of dealers has become a little tight, the economic slowdown has led to tighter lending from banks which could also be a very big issue.
On a total macro level, the amount of finance available with the dealer is quite adequate. I am talking of Maruti dealers here. However, it is not evenly distributed between all the dealers. Also we found that a small percentage of dealers, about 20 percent of them, had actually diverted money taken from car financing into other things. That is where the banks got upset and put all these blanket restrictions on collateral and things. But thanks to the intervention by the finance minister and the finance ministry, I think the banks are now adopting a case-by-case approach and those dealers who have followed the regulations and the systems all these years, who have a good record with the banks, they will not be subject to these collateral restrictions. This will only work where people have not done their business correctly. So, I think this is a very positive change which is happening and I hope that this will go on with the companies like Maruti at least that has been following up the use of dealer finance is not diverted to any other use and the work is done exactly as it should be done.
Do you feel that the entry level market which is obviously a big opportunity size is not well tapped in because of the rural distress?
You know the rural market had been growing till a year ago. And this rural distress has been there for the last, many decades, it is not something new that rural distress has come this year or last year. Suicides in the rural areas, droughts in the rural areas, distress in the rural areas have been there from ever since I remember. But in the last 12 months, the sales for the first time in the rural areas also came down and the negative growth was the same as in the urban areas. I think this was because of the kind of problems we had last year -- flooding in areas, drought in some other areas -- but I think this year, with the rains having completely made up the earlier June deficit, I think the sentiment is changing and I think this year again we will see a revival in rural demand and I believe that 2021 you will see a good growth of rural sales.
Impact On Dealerships
Does the slowdown impact dealership addition plans, have we seen any shutdowns and part two of my question is on inventories. Most people that we speak to say you are probably on the best place on the inventory management front. What would your comment be to that?
No, normal management practice is not to carry more inventory than you need or what is your normal inventory. Because carrying inventory not only adds to costs but it ages the vehicles and the customers don’t like old vehicles. So, as a matter of practice, right from the beginning, we have always said that production must follow sales and sales means retail sales, not wholesale sales, because we don’t like pushing vehicles through the dealers and making big stocks to the dealers because that is as bad as or maybe worse than keeping it in a factory. So, we always try and adjust our production levels to follow what is happening in the retail market.
Okay, what about the dealership edition plan sir? Have we seen major shutdowns at the Maruti level as well?
The dealers have at the moment the inventory which if it was normal sales, it would be like a month’s inventory which is the norm. But because the sales have come down, the inventory had reached about 40 days which is a little excessive according to our standards. But I think now, with the festival season coming, and are cutting down productions and dispatches to dealers it will come down to the level required.
Is the slowdown, is it impacting the dealership addition plans of Maruti Suzuki?
No, we are continuing with our plan for expanding dealership, both the Nexa’s conversion to the Arena and opening new outlets in the rural areas. All these plans will continue exactly as they were prepared planned earlier. There has been no slowdown, no cutback in any of this. Our very firm belief is that this downturn is very temporary. It is not going to be forever. If we once slowdown the tempo of creating new dealerships and increasing the sales and service network, it will be very hard to get that back again. So, we will continue to do what we are doing in terms of sales and build service network.
Turnaround
Mr. Bhargava, when we had a conversation to months ago, you said August will be a turnaround period for yourself. Do you stick by that? We are in the midst of August and if not, what do you push your turnaround target to? And the second part of my question is with regards to new launches, and new models that your company should look at in order to make sure that the market size keeps expanding because currently, it seems like new models, new launches instead of expanding the market are sort of cannibalizing the market.
You know the forecast on the August turnaround has obviously gone wrong. But that time, I must confess I had no idea that the state government will be creating this extra burden on the customers. Nine states have done it, and some major states, by adding to road tax. This makes the task of forecasting the future much more difficult.
If the state keeps looking at the car industry or the whole auto industry in fact where they can keep periodically increasing taxes and taking more and more out of this industry, I think this industry’s future is going to be a question mark to some extent.RC Bhargava, Chairman, Maruti Suzuki India
If the Auto industry has to grow, cars have to remain affordable and without the auto industries growing, and the manufacturing industry is not going to grow fast enough, jobs are not going to be created as fast as they should. So, I think state governments should relook and rethink about taxing anything relating to cars; as if it is a luxury good which can bear any amount of taxation. And without that happening, I don’t think this forecast or future growth and all that can be made with any certainty.
As for the new model launches, that will continue exactly as planned. And this time the new models include the BS-VI models also. The BS-VI models as well the new models launches which were prepared, the time schedule was set almost three years ago, and that has to continue. There is no point in changing that at all. We have six or seven BS-VI models already in the market. The XL6 is I think due to be launched in the next couple of days as well.
