Demand Isn’t The Biggest Problem For Indian Automakers, Says Maruti Suzuki’s RC Bhargava
As India enters the second phase of reopening its economy, demand isn’t the biggest problem facing the automobile industry, according to the chairman of the country’s largest carmaker. In fact, demand is on the rise and will continue to do so, at least in the short term, he said.
That, however, isn’t enough to bring a V-shaped recovery for the industry, which is still struggling with supply-side issues due to the pandemic apart from cost headwinds it has been facing over the last few years, Maruti Suzuki India Ltd.’s RC Bhargava said in an interview with BloombergQuint.
The most urgent of the problems is the lack of manpower, which affects the end product and the components that go into making a car, he said.
Agreeing with Prime Minister Narendra Modi’s speech this week, Bhargava said people’s lax nature and the increasing cases have a direct impact on lockdown rules, restrictions and availability of workers to run the factories. “It’s very difficult and you don’t get the smoothness of operation that you need for working at 100% capacity and that’s the challenge we have to face in the next month or more.”
India has reported over 6 lakh confirmed cases of coronavirus so far with over 2.2 lakh of those currently active. Over 4 lakh of the total cases were reported in June alone. Bhargava expects July to see an even larger number. However, if everyone were to follow rules and regulation the way they were meant to, industries like automobiles could ramp up production far more significantly, he said.
“People may think ‘let me party, how does it matter if I get Covid, I’ll go to the hospital or treat myself at home. I’ll get cured because the mortality rate is low in India, I’m a young guy, no problem.’ But they don’t realise that this attitude adversely impacts a large part of the economy and when people start complaining they don’t understand that their own actions are contributing to it.”
Maruti Suzuki is still trying its best to expand production, Bhargava said. It received permission to run two shifts at its plant in Gujarat which has a capacity to produce 500,000 cars per year and manufactured a large number of the small hatchbacks, which according to Bhargava, are getting more popular.
He expects demand to rise—more than the company can supply—for the next six-seven months as customers exhaust the pent-up demand while some buy cars to avoid public transport amid the pandemic. “Once that past demand is taken care of, we will once again run into the barriers that we have had in the past,” he said.
Even before the coronavirus pandemic hit, India’s auto industry was facing multiple headwinds—a switch to a cleaner fuel engine, higher taxes and insurance costs and overall diminishing consumption in the country.
Once the pent-up demand is exhausted, the government will have to look at the total incidence of all the taxes and costs on an automaker and re-price to make owning cars more affordable, Bhargava said.
It’s a huge creator of employment and huge creator of revenue for the government so it’ll make good sense to try and get the volume of car sales—for the industry—to a much higher level. I think the whole economy will look different if that happens.RC Bhargava, Chairman, Maruti Suzuki
Watch the full interview here:
Read the edited excerpts of the conversation here:
The auto monthly sales numbers are much better than what was done in May. How do you assess the situation on ground?
The situation as far as the market is concerned is certainly improving. But unfortunately as our Prime Minister also said yesterday, people are not following the rules with the kind of discipline which is required and difficulties are coming up because of the increasing number of cases every day. It’s very difficult to get production back to the days of normalcy like we used to have a year ago unless the other conditions around us are more or less normal. Because if lots of people keep getting Covid and restrictions come along, someone is in a lockdown, someone has a containment zone somewhere, you need permits. It’s very difficult and you don’t get the smoothness of operation that you need for working at 100% capacity and that is the challenge we have to face in the next month or more. I don’t know how long people will take to understand the importance of doing what the government requires you to do to keep safe.
I’ve read some of the recent interactions or interviews that you have given to print and digital mediums as well talking about the V-shaped recovery in auto demand. Could there be hindrances because world over, we are seeing the lockdowns getting back into place.
The V-shaped recovery depends both on the demand and also on your ability to supply that demand. I’m saying that because of what’s happening all over the country and especially in some parts of the country; regarding the way the epidemic is spreading, things are not normal and the difficulties in the short term now are not going to be through the demand side. The difficulties are going to come from the supply side.
Would you reckon that everyone is quantifying whether how the demand for these would be GDP plus some number. Right now considering that GDP itself is difficult to comprehend and what you said that recovery will be demand-led and not supply-led. It is better not to bring that conversation into the mix at all—what the GDP numbers could be and what the industry numbers could look like?
Personally all these forecasts of numbers don’t mean much to be quite honestly because these are not based on a realistic assessments of all the variables. Some people make better forecasts and do better research but even then the variables, especially in a country like India, are so many that I don’t think it is really possible to make any kind of an exact forecast. Even if it was, the issue today is that unless everyone does what they are supposed to do in the manner that you’re supposed to do, we cannot get the results we expect. The people who make these forecasts make some assumptions of how people will behave but if you don’t get that behaviour pattern in the country, what happens? The result is differently from what has been forecast. I don’t think that anybody thought that after this long period of lockdown we had when the government started unlocking that the result will be that some people will go almost berserk and say now everything is back to normal. It isn’t back to normal and it won’t get back to normal for a long time. Everybody has to follow all the precautions that the government says. They have to look inwards and see what they are doing before they criticise others.
Just wondering, as things stand right now, is it futile to try and look at what happened in May the number was so low and then June when the numbers bounced back—whatever estimates people had in mind and just wondering if you also thought that the recovery is looking decent or is it futile right now? Second guess on what the trend might look like?
The numbers will go up in July from June also and they will go up quite significantly. I’m saying that if there was a control over the disease and things were heading towards normalcy in the sense that the daily infections that come positive are falling and the number of containment zones are reducing, the restrictions that the government is putting are coming down, then I think we can increase much faster than what we will be able to do because there is a market demand that will support a much faster production that what we will be able to do.
Don’t you think job losses and salary cuts, fuel rates being high, loan rejection rates also high as for a survey done recently because of the moratoriums and customer income question marks etc., you don’t think these would be impediments to demand?
These impediments are there but the government also helps these impediments in various ways. Liquidity has increased, rates of interest have come down, and banks are finding that at least for the auto sector particularly for Maruti cars, the NPAs are very low. So banks are not all that reluctant to lend to this sector. They are reluctant overall because of the NPA problem but not everywhere. Sometimes we have to point out to the banks that look, NPAs are problem in this country but just because some guy who creates a scam and then runs away with thousands of crores, it doesn’t mean that the sector which is returning the loan on time, paying interests should suffer because of it. Sometimes banks lose focus and tend to treat everyone alike. That has to be corrected from time to time.
A lot of brokerages are giving some importance to this India-China stress and what it could do to OEM manufacturers and therefore could there be issues for car companies because supply of parts might not come in time. How serious is this
As far as I can judge, I don’t think the government will do anything that will hold up production on auto or any other sector which is an important manufacturing sector.
What about the supply-side issues? What is Maruti doing in the current scenario with all the variables surrounding it?
We are doing our best to expand production. The managing director is having meetings daily to see what can be done. The biggest constraint is manpower and getting workers to come in. For e.g. The Maruti Suzuki Gujarat plant is an important plant for us to sell enough cars in the market. They have a 500,000 capacity which is in place there and they are making some products which are in great demand today because the market has shifted towards smaller cars and smaller hatchbacks. Gujarat makes the Baleno. The Baleno is in great demand but the problem in Gujarat is that only from July 1, we have permission to work in two shifts. Up till now, it was restricted to one shift. That’s one big step forward but for two shifts you need enough manpower.
A lot of people from Gujarat have gone back to their villages. They have to be brought back; you have to have enough people come back to Gujarat, not only in the Suzuki factories but also in the vendor factories. So that’s a challenge in Gujarat. In Haryana, there is a challenge of growing Covid positive cases which leads to new containment zones. If you’re in a containment zone, it’s not easy to get out of it. It has an effect on other areas too. People may think it doesn’t matter, let me party. If I get Covid, I’ll go to the hospital or treat myself at home, I’ll get cured because the mortality rate is low in India, I’m a young guy, no problem. But they don’t realise that this attitude adversely impacts a large part of the economy and when people start complaining about the economy not improving, they don’t understand that their own actions are contributing to it.
A few sensible ones, their belief is that preferences would change to two-wheelers and smaller cars. You mentioned that briefly in your earlier piece that you seem much larger demand for hatchbacks. Could this be a large shift over the next twelve months that demand could be for entry-level cars or two wheelers for the sector at large?
So far this year—last two months—the percentage of cars that fall under this has gone up by 6-7% which is a fairly significant shift. It looks like its increasing. The Alto for example; today is in short supply. At one time everyone used to say oh there is no demand for Alto and its sales are falling but today the opposite is happening.
What is your gut telling you? Would this trend continue?
I think for the next few months it will continue because there is a certain amount of pent up demand. Compared to last year, sales have dipped 16-17% whereas there should’ve been a growth but we know all the reasons for last year’s problems. There is a lot of pent up demand from the first quarter and that has to come out somewhere. Once that past demand is taken care of, to some extent it may go up because people won’t want to take shared mobility—it will take maybe 6-7 months for all this to play out—after that we will once again run into the barriers that we have had in the past. The affordability of cars to enable growth to take place will then require the government to look at the entire customer pricing of cars, what are the taxes, making the cars more affordable to people—ultimately boils down to costs.
I was talking to Hormaz Sorabjee about a month and a half back and he said this whole SUV boom that we’ve seen will now come under check in a meaningful way because people will be more frugal in the spending and a lot more rational in their spending. Would you go out as far as that believing because everybody loved buying SUVs. Do you think that it gets halted for the time being or for a long time?
I really don’t know how people will behave but at this point as people are looking at smaller cars and hatchbacks; it will have some impact on the SUV market.
Is Maruti thinking to change their product mix in any fashion whatsoever or is it too soon to think about that?
Certainly a bigger SUV is in the picture for Maruti but it’s not going to come this year.
Aren’t you thinking as and when demand comes back to align the portfolio towards the smaller cars?
Let’s see how the market behaves and there are always products in the pipeline; whether it could accelerate, what kind of production volume they should put in, what changes are required if the customer behaviour changes. These are things we have to see because this change in portfolio all depends on how people behave because this entire Covid thing will lead to changes in thinking in behaviour patterns. I’m not sure what those changes will be.
As one brokerage house said and a lot of people are talking about it—this convergence of the price strategy of petrol and diesel and how because of the optics arbitrage is going away. The consumer preference might shift towards petrol cars. Is that something you could try and second guess?
The shift towards petrol is happening very fast and the government policies seem to be aimed to make that happen even faster because in Delhi you’ve seen diesel is costlier than petrol. So, along with other handicaps for a diesel car, the Supreme Court’s order of 10 years for a diesel car, 15 years for a petrol car; most people who are not running thousands of kilometres in a month, it doesn’t make sense to buy a diesel car. The economics of a diesel car now will only become favourable now if a guy is going to run 3,000-4,000 kilometres in a month which only commercial kind of usage leads to but individuals, families—they don’t run that kind of mileage
Any key takeaways from conversations with dealerships, factories etc.? A lot of people are trying and speaking of how consumers will down trade. Are you getting any kind of feelers out of that while consumers are trying to buy lower price variants compared to what would have thought of buying earlier? Any thoughts there?
Dealers are quite gung-ho about the coming upturn. The Maruti dealers’ stock at the end of June is going to be around 80,000 cars and the market demand for Maruti cars will be as high as 120,000 and I don’t think we will have enough cars to sell 120,000. So dealers will be on another kind of wicket where they will put pressure on Maruti saying please give us more cars.
No fire sales for the industry at large because companies are grappling?
I don’t think any company today has the problem of excess supply because they are just starting with BS-VI. BS-IV problem is behind us. So fire sale was expected on BS-VI before the end of the financial year. Whatever waste there was has now been dealt with. Now the point is how soon you can ramp up your BS-VI production.
Is there a silver lining on the operation metrics front? Lower costs, commodity costs plus companies could’ve aligned themselves to have lower costs naturally because of all that has happened due to the lockdown?
Reduce cost is the mantra for the future. Companies must reduce costs in various ways; the government must look at the total incidence of various taxes and come to a more reasonable level of pricing so that the industry can boom. Remember, the greatest generator of employment and auto is a sector that keeps creating employment opportunity throughout its life. So it’s a huge creator of employment and huge creator of revenue for the government so it’ll make good sense to try and get the volume of car sales—for the industry—to a much higher level. I think the whole economy will look different if that happens.
Will it show positively in the April to June quarter or the September quarter?
April there was no production, May we put a few cars on the road and in June 57,000. As we go along each quarter, it will be better.
What has been key learnings, key takeaways from this whole experience?
Our main strength has been workers’ identification with the company and that they are regular employees and in areas where they think their future and the company’s futures are interlinked—in those areas they returned much faster than the contractor provided labourers because they didn’t have that commitment. I think going forward; Indian companies need to recognise the aspect that get workers identified with the company and build some kind of a relationship with them.
Let them feel that if the company’s’ growth—if it happens, will also result in their growth in various ways. I think that’s the way the Indian industry needs to go because we have to have to have a more equitable society and our political system and the economic system will not support the society and the industry has to recognise that and organise it in that manner.