Revival Of The Auto Industry Likely To Start In The Third Or Fourth Quarter: RC Bhargava

The crisis in the automotive industry has been the talk of town lately and we are just not talking about the sales slowdown anymore, we are talking about the larger economic impact and of course jobs in this sector as well. We got a chance to talk to Industry statesman and the Chairman at Maruti Suzuki, R C Bhargava.

Also Read: Auto Sales Hit Rock Bottom: July 2019 Sees 31 Per Cent Decline

For a sense of why it has become such a big crisis today, why it's not been able to be controlled earlier? Give us a perspective of how you see us having reached this point?

The slowdown or lack of growth started almost four quarters earlier, in the first three quarters, it was either 0 or minus a small number. It was not something to cause any alarm anywhere. In the last quarter, the Q1 of this year, 18.6 per cent, I think that's what caused everybody suddenly woken up and say what's happening. And this is happening in the four wheeler or car industry, it's happening in the two-wheeler industry and in the commercial vehicle industry. And the impact on the economy, people are only looking at jobs in the factories of the vendors and the factories of the manufacturers, that's actually a small part of the impact. Unfortunately, our system of reporting employment and what are economists advise, doesn't go what happens to a car after it leaves the showroom and what kind of jobs are created. The transportation of the car, the sale of the car, insurance and financing, then the drivers who are employed by people who buy cars, these driving schools, repairs, petrol pumps, ETC. You know the kind of things that happen downstream is not even visualised by people recording employment. Of course there is an impact in the factories, but it's not earth shattering. What happens to the rest of the economy I think is going to cause a lot of worry.

Also Read: Passenger Vehicle Sales Slowdown: 10 Things You Need To Know

The slowdown in the industry started four quarters earlier, but in the first three quarters, it was not very alarming 

One of the things which have been striking many of us in the past as well and as you mentioned in the first three quarters when things were dull. Would you say that the industry is out of control now as compared to just a cyclical slowdown which comes from several factors?

It started as a cyclical slowdown, but what has abbreviated the depth of the slowdown is that this year the cost of the car to the customer has gone up to an amount which I think never has happened before. And that has happened because of a number of regulations and a number of changes in various governmental things, state, centre, different agencies, insurance have all come together in one year. I think there's nobody who, and there is no agency for this who visualise that if all these things are happening together, what impact will it have. If you look at the road tax, several states in the last six-eight months have increased road taxes from 1 per cent to up to 5 per cent of the cost of the vehicle, that's a huge huge amount. Insurance has gone up by a few thousand rupees. The safety regulations have all come into force, so the airbags, ABS, the side body impact and you know how costly these are. And of course the BS6 changeover. Okay, Maruti is the only manufacturer so far, I am not including Mercedes, I am talking of the mass market who have put six or seven BS6 vehicles in the market and the cost impact is there. Others haven't, but this impact is going to be felt. And the result of all these four-five things coming together, is that the price of the car to the consumer, which is what matters, has gone up very sharply, up to 10 to 12 per cent in some cases. 10 per cent increase in the car price is not small. We have done price increases by 1 or 1.5 per cent, that kind of things. Suddenly you have a 10 per cent increase in price, what compounded this problem of price increase further was the banking prices, BBFCs prices. The amount of money available for auto finance has come down by almost one-third. The bank started asking dealers to provide collaterals of up to 50 per cent for inventory financing. Reduce the ability of dealers to keep the adequate inventory. The customer finance rates have gone up, now of course 1-2 banks have started cutting down after the government and the reserve bank had put pressure on them, they have started cutting down. The interest rate went up, the amount of deposit that the customer has to make went up. Indian customers, the bulk of them are not the people who have fat wallets and a lot of surplus lying at home. They are in most cases, more or less marginal buyers and for them if you just add all these together, it makes unaffordable and I think that's the real reason why the last quarter has witnessed what's happening.

Also Read: Maruti Admits Lack Of Clarity On Upcoming Petrol Vitara Brezza Has Hurt Sales

Maruti Suzuki Chairman R C Bhargava says slowdown will also have an impact on jobs outside core auto industry

Is there an understanding of the fact that these are the unprecedented times at the government end?

I think so, yesterday the prime minister's interview was in the Economic Times. And I may be wrong but I think it's the first time that not even at the Prime Minister level, at the ministerial level somebody has said that the ICE vehicles and EVs have to co-exist. I mean I don't remember, you might remember who has ever talked of ICE vehicles and the auto crisis will have to solve. Now the Prime Minister saying that means he has become available and aware of what is happening. And if the Prime Minister has become aware it takes cognizance of something has happened. The second thing is that the Finance Minister. On the meeting with the Finance Minister and this is the first time I have attended any meeting with the Finance Minister, I had never attended any meeting before. I was quite amazed with her ability to cut to the bone, to analyse what people were saying. People talk a lot of irrelevant things she would just say how does it matter? She is very sharp and very very good at this. So I think with that combination and the Finance Minister becoming fully aware of this crisis, she knows it affects the budget, the economy the tax revenue and everything. I think that we should expect government's intervention. The government has to become fully aware of all the factors which have happened and like this States going off and imposing road tax, insurance doing something, banks doing something. I think all these things have to be attended to. In many cases it's autonomous institutions, it's not easy. But I have confidence that the Prime Minister and the Finance Minister, if anybody can wake these change, these are the two persons who can.

Also Read: Maruti Suzuki Chairman Expects Government Intervention To Fix Auto Crisis

Maruti is the only manufacturer so far who has put six or seven BS6 vehicles in the market

Are you worried about what the reports have suggested that if GST is cut for the auto sector then it'll have to be for other industries too?

This is something at which the government has to look at and decide. Look at their plusses and minuses and decide what to do. In 2009 and 2014 there was again a downturn like what you are talking about but they were not as deep as now. Both times GST was cut by 4 per cent. So it's not that there are no precedents for this happening. But whether with the current situations with current financial difficulties of the economy as such, whether this will become possible or not only government can decide, I can't make a view. The industry has made its representation but the ball is now with the government and nobody can now prejudge what they are going to do. But along with this some of the other factors which we are talking, for example with insurance which is a Supreme Court's order. But even going to the Supreme Court and saying that look putting three years insurance all together doesn't solve any problem. What happens after three years? The car can run without insurance so the problem it arises after the first year will arise after two more years. It's not a solution to anything. So that kind of things that States rolling back road tax for a year or 18 months and then doing it. I think it's a little nudging to the states to... It's not that it will take it away but just that don't let it all come together. The proposed increase in registration charges is still a draft, it can be referred till the crisis is over. So there are many things which kept up even without cutting the GST. Whether government does GST or not, I won't speculate or anybody should try and speculate on a government's decision on the GST matter.

Only PM, Finance Minister can help the industry, says Maruti Suzuki Chairman

On the consumer side, there has been of course as you mentioned a lot of apprehension and a lot of confusion as well regarding BS6. How do you address that?

In our case where we have introduced BS6, we find that BS6 models even at higher cost are accepted by the customers and we are able to manage that, but the vehicle we have been having the problem so far has been the Brezza, it's a diesel car and we have announced that the diesel Brezza will not be carried over to the next year and just a possibility which I have been told that the people think is happening is that the Brezza as a model will disappear. Not true.. Well before the end of this financial year we'll have a petrol Brezza in the market and I don't think customers are aware of that. And when we'll have the petrol Brezza in the market, all these fears will go away. Spare parts will not be available, service will not be available and it's a defunct model, is not valid. So, I think people need to know that there is a petrol Brezza coming around which is exactly same vehicle except the petrol engine. We're not phasing out the model, that's the end thing and to give confidence on the diesel also, we have extended the warranty on the Brezza to some five years or so that the people don't feel worried that the car will not work or something like that. This kind of actions are required, a lot of actions are required by the company themselves.

Maruti Suzuki says that BS6 models even at higher cost are accepted by the customers

There have been certain sources who have also suggested that those who are reluctant , unlike Maruti to start to launch some of these BS6 models quickly to allay some of these confusions and fears they are still not doing it and they are not doing it in the interest of their margins. Is that a fair argument?

I really don't have the knowledge on this. But the reason for not launching a BS6 need not be margins only. I am not sure margins as such get affected in BS6. But also the availability of the BS6 model in the time to launch well before the deadline is another issue and if the company hasn't been able to change its BS4 model into a BS6 model, how does it work? So I don't know which of these arguments are valid for which company. See we have 16 models or something, so in no way I could have done all of it together. We have very little option in this matter and we have started BS6 from almost from the beginning of this financial year. And we have got six models going which covers may be 70 per cent of volumes of petrol cars. And it doesn't directly affect margins at least.

What is your personal view on what happens with diesel from here on because that's another factor which has created confusion in consumer's mind?

People after BS6, diesel will be as clean almost as a petrol car, on emission side nobody should have any worries that the diesel BS6 is an unclean car. The cost will go up quite a lot. So, the customer has to worry about the cost factor of a diesel car and if it is worth buying or not. The third factor is Supreme Court's decision that diesel beyond 10 years in the NCR now that creates a feeling in other parts of the country also that when will this 10 year thing come to us. So petrol continues for 15 years and diesel for 10 years although in terms of cleanliness there's not much difference. So whether the government will review this decision or not review this decision, nobody knows. But to me it would certainly help diesel sales in the future despite the cost increase. If both are put at par, there's is no reason why a BS6 diesel should be treated differently from a BS4. The fourth factor is hybrids, if I have a petrol hybrid and I am talking of Toyota's hybrid technology and not others which are not so efficient, the petrol hybrid and the diesel are roughly at the same cost level and roughly give the same fuel economy. So the customer then gets a choice that should I buy a diesel car or should I buy a petrol hybrid. In Europe you are seeing that diesel sales are down and people are buying more and more hybrids. What our Indian customers will do is still not clear but that's another option. So all these factors will come into play and how to predict the result

While BS6 diesel vehicle will be as clean as a petrol, the cost of it will go up quite a lot

Your opinion or the opinion within Maruti when it comes to hybrids? It could be a great alternative to diesel as well.

I would like to see the GST benefits being related to the cleanliness of the car. Conventional ICE cars are obviously the worst I must bring this to your attention which I think people forget that so far in India the pollution which is in NCR and in most other cities is not because of cars. I am not talking about auto vehicles, cars is 2 per cent or 2.2 per cent by one study of the IIT. 3 per cent or something by TERI. So it's not that but still, let's still talk about the cleanliness of cars, it's an easy target and I believe that hybrid cars if they give you 25 to 30 per cent more fuel efficiency, that means they are reducing the need to import by 25 to 30 per cent. It's not emission alone which in my mind at the current stage of our industrial development, reducing oil import is a more important objective than reducing car pollution because the car pollution is yet to reach worrying levels. We are sure with BS6 it becomes a much better situation. So hybrids should get a duty cut. CNG should get a duty cut because it completely eliminates oil. It uses gas for which we have more gas in India but we have also contracted and theirs is global surplus of gas. It's a clean fuel, so why the government is not looking at both these options. Because electric vehicles will come, they have to at some point but the timing has to be looked at. And this is not the time when you want to have mass acceptance by the customers of EVs. That's not going to happen for the next few years. So in this period particularly, you must push hybrids and CNG vehicles to reduce oil imports, not talking of emissions but to reduce oil imports. So GST cuts on both these I think are very very important.

Would you say that the strategy for Maruti going forward would be to stress on CNG and Hybrids in the short term?

The government is stressing on CNG. You heard the Petroleum Minister, she is opening 10,000 more outlets, the Prime Minister opened a whole lot of new CNG tenders. So CNG is now accepted by the government as the fuel for transportation. And for most things, we follow government policy. The reason I say it's GST cuts isn't because the cars won't sell without GST cuts. There's a different reason for it, there is a whole lot of retrofitting of CNG happening in the market. So those cars in the market is substantially cheaper than the factory fitted cars largely because people don't pay taxes and duties and the safety of the retro fitted CNG can't be guaranteed. We have had no fire incidents with the factory fitted CNG cars but there have been a number of incidents with aftermarket CNG cars and all the retrofitting is done by imported parts. You want make in India! How do you so make in India if you allow these cheap under invoice parts coming in. So it's not only because I want cheaper price for customers, of course I want cheaper price for customers, but beyond that I want that we should make CNG kits in India. We should make volumes of manufacturing so that the cost of production of CNG kits should come down and the safety level of CNG cars can go up.

2021 will certainly see a fairly strong revival because there's a lot of pent up demand.

What we hope is something does happen by way of incentives or some policy decision, but assuming that doesn't happen and we don't know, have you seen the bottom? Was July the worst month?

I think revival in the sense of positive growth will probably start from the third quarter of this year, third or fourth quarter, partly to be honest because of the lower base effect. Last year's base was low in the third-fourth quarter. But after the fourth quarter when we get into 2020-21, this BS6 problem will be over. Many of these increases in prices if they have been rolled back will come only gradually I think. Somebody should see that everything don't come together and give customers a bad message. So I think all of this will happen and next year in any case I am very hopeful. 2021 will certainly see a fairly strong revival because there's a lot of pent up demand.