The Indian economy is gradually recovering from the twin shocks of the Covid-19 pandemic. However, the automobile sector is yet to gain traction whereas sectors like real estate and tourism and hospitality - which were completely devastated by the pandemic - are showing green shoots of recovery. Heightened government regulations, increased vaccination coverage and enhanced public participation is enabling this recovery.
The festive season that starts from Onam and continues till Diwali, provides an important window for the automobile sector in India as the sector generally witnesses an increase of sales in the period.
According to Shashank Srivastava, Senior Executive Director, Maruti Suzuki India, “While we compare with last year, it looks positive this year. But when you compare it with the peak of 2017-19, then we are still 22-23% off. I think we would have to be very careful in saying whether the market is better. It looks better than last year, but when you compare it with the peak of 2017-19, we are way off.”
In addition to sluggish demand, the semiconductor shortage remains a global challenge. Accounting for this shortage of semiconductors, Maruti Suzuki India had declared that its vehicle production in September will be 40% of its normal output. Other important automobile makers like Mahindra and Mahindra have also curtailed their production. The shortage of semiconductors has increased the waiting period for customers – creating a major deterrent in the Indian automobile market.
According to Rajesh Menon, Director General of Society of Indian Automobile Manufacturers, “Semiconductor supplies to Tier-1 and Tier-2 component manufacturers have been affected and they, in turn, have expressed inability to supply components of Engine ECUs, Keyless Entry, ABS Systems, etc. in required quantities to the original equipment manufacturer (OEMs).”
This unforeseen challenge has dulled the festive season for automobile companies as customers are unable to procure the vehicle of their choice or avail the lucrative schemes that are generally designed to push sales during the festive season. Accepting the situation, Vikash Gulati, President, Federation of Automobile Dealers Associations (FADA) stated, “Unlike last year when demand was a challenge, this time supply is becoming a bigger problem due to shortage of semiconductors, even though there is high demand for passenger vehicles.”
The Indian automobile market is dominated by Maruti Suzuki. Nearly every second car sold in India is by Maruti Suzuki. Due to this semiconductor challenge, Maruti Suzuki could sell 1.03 lakh passenger cars in August 2021, while it had sold 1.13 lakh passenger vehicles in August 2020, when the country just came out of the prolonged nationwide lockdown.
The current fiscal was crucial for the Indian automobile industry as it witnessed a catastrophic effect in FY21 as sales volumes were pushed back by multiple years. The growth rate of the index of annual production for the automobile sector was 7.5% in the financial year 2016-17, which dropped to -24.7% in the last financial year of 2020-21. Now, the chip shortage has come as a double whammy, giving a severe blow to the automotive sector already reeling under severe stress.
Looking ahead, the sector will need government support and proactive involvement to come out of the doldrums. Financial incentives to prospective automobile buyers, sops for manufacturers and some serious government buying may improve the situation.