Many Indian automobile companies are not able to make a mark in the global market because their products are mediocre, says Bajaj Auto Managing Director Rajiv Bajaj.
In an interview with CNBC-TV18, Bajaj said 5 or 7 percent decline in retail sales cannot be called a crisis and the industry should take steps to become globally competitive before asking for a stimulus from the government.
“I remember, in 2015, a lot of people in the industry scoffed at Bajaj Auto because in our preoccupation with exports we were probably not doing justice to the domestic markets. At that time, export markets were down and India was doing well. Well, perhaps we were somewhat guilty of that and I think we corrected that in the last 15 months. But in the same way, I would ask the industry, have you done enough in terms of becoming global?” he asked.
Excerpts from the interview: At a time when the industry is desperately looking for a GST rate cut, some sort of intervention from the government ahead of the festive season, how do you feel about statements coming from Chief Economic Adviser Krishnamurthy Subramanian and former vice-chairman of Niti Aayog Arvind Panagariya?
Normally one would have dismissed these as being the views of academics but frankly the facts support them. This has been my view also when I have said that all I believe one should look at is possibly a GST reduction in conjunction with BS-VI implementation. If you look at the numbers in terms of motorcycles, I was looking at these numbers yesterday, year on year the decline in retail sales is only around 5-7 percent. I don’t know what it is for scooters because we don’t make scooters any more. Somewhere I read that about 5 percent is the retail decline for passenger vehicle industry also year on year for the April-July period.
If 5 or 7 percent decline in retail sales can be called a crisis, then what is it we mean by the normal up-and-down cycle of a business and the ability of a robust business to absorb these minor shocks?
Do you agree with Arvind Panagariya that this also shows auto industry has not invested enough to be competitive globally as well?
I agree with Panagariya, I agree with BVR Subbu and Jaganathan, the article he wrote sometime back. There are four areas where I think the industry must first look at, its own short comings, before talking about stimulus from the government. The first is about the industry’s domestic focus. Frankly, among the Indian firms, I can say that TVS and Bajaj Auto are the only two companies that have exports worth talking about. Today 40 percent of what we make is exported and it is about 20 percent for TVS. For the rest of them it is 2 percent, 5 percent and 7 percent. So the first point is that if people had invested in global markets over the last 10-15 years as some of us have done and their exports had been 25 percent and not 5 percent, then a particular market like India being down for a period of time by 5 or 7 percent would not have hurt as much as it is apparently hurting now.
I remember, in 2015, a lot of people in the industry scoffed at Bajaj Auto because in our preoccupation with exports we were probably not doing justice to the domestic markets and at that time export markets were down and India was doing well. Well, perhaps we were somewhat guilty of that and I think we corrected that in the last 15 months. But in the same way, I would ask the industry, have you done enough in terms of becoming global? So that is the first issue.
The second issue is of mediocre products. Lots of these companies are not able to export because frankly by global standards, their products are mediocre. Obviously I don’t want to name them but when you make everything -- when you make scooters, bikes, cars, jeeps, SUVs, trucks, buses and everything under the sun, you are obviously not going to be world class at anything. That is the second shortcoming in terms of mediocre products that the industry has to overcome and that is what these gentlemen have referred to.
The third one is in terms of innovation in domestic market and the fourth is in terms of cost structure. Some of us, both in terms of operating costs and particularly in auto industry, some manufacturers are guilty of imposing very high fixed costs on their dealerships. That is all well and looks glamorous in good times but it becomes a big millstone around the neck in difficult times.
Subbu, the former president of Hyundai Motors India, have said that OEMs billing dealers is not equal to sales. Do you think this is an approach that industry will have to follow in the days to come?
Certainty it makes complete sense to move to retail sales and all of us are doing that. I think Tata Motors did that a few months ago and all of us are now focused on making sure that retail is at least equal to wholesale if not higher. But the fact is that starting with September last year when the industry in its ignorance was anticipating an extraordinary festive season and that did not happen, those stocks continued to hang around for a while. That is now getting corrected because nobody can carry this for much longer given that we have to stop selling BS-IV vehicles very soon. Therefore there is this gap currently between wholesale and billing which makes it look as if the industry is down by 15-20 percent but the reality is it is not, it is down by only 5 to 7 percent.
I would agree that in difficult times the government should not make it worse by doing things like raising registration duties or charges at this stage. But whether 5-7 percent retail decline is enough for the whole industry to get together and scream for help, frankly, I am not convinced and at least I am not party to that.
So you are saying that this fear-mongering is not required and this is something Arvind Panagariya also referred to in his article. But going forward the position that you are taking is completely opposite to what the rest of the industry is saying. I think the industry in one voice is saying that they need a GST cut immediately, that they need an intervention in banking sector in consumer finance, in inventory financing as well, they need a scrappage policy, they need positive messaging from the government. They also say there will be more losses in jobs; there have already been 3.5 lakh temporary jobs that have been lost. How do you respond to that?
I would say as far as positive messaging is concerned, for me the only dissonance the government created was when they proposed the electric vehicles push, which all of us thought was a bit extreme. Now that has been more than clarified by various ministers, including by the prime minister himself. Now that is a thing of the past and we should not go there anymore.
As far as the issue of inventory financing is concerned, I don’t know whether inventory financing itself is such a big issue for the large companies involved. All of us are wholesaling to dealers and extending credit, most of us are cash rich and I don’t think that is a big issue. Yes, retail financing to the consumer might be an issue, but again one has to understand that there may be a good reason for some of that to happen. Again I don’t want to take names but let me tell you for a long time, in every segment, whether it is scooters, motorcycles, three-wheelers, trucks or light trucks, there have been manufacturers who have used their captive finance arms to shove products down the throats of customers when customer didn’t really want to buy them and then you end up a year later with 15-20 percent bad debts. Now how is that good business? So if some company, some NBFCs or others have pulled back in terms of retail financing I think in many cases that is for a good reason.
As far as job losses are concerned, my view is this that if retail is indeed down by 5-7 percent, at the most you can say that you need to correct employment by 5-7 percent simplistically speaking, and frankly, I would not do that in Bajaj Auto. I don’t think I can build a strong long-term world class business if my message to my employees down the line is going to be that “look guys, when the going is good, I want you to work here not as an employee but in the sense of ownership, but when the going is tough by just 5 percent, I am going to throw you out on your arse”. Now, you tell me if this is going to be double speak and we cannot cushion the shock for even 6-12 months especially when most of it is our own making in terms of some of the shortcomings we talked about, then how are we going to build sense of ownership and commitment in our people?
That is a very important point that you are making and I don’t know if the rest of the industry veterans would agree with it. But do you feel that even without a stimulus package, without a GST cut from the government or a cess reduction, the industry can handle this slowdown in profits, this slowdown in sales for the next six-seven months till the time BS-VI is rolled out from April 1, 2020?
I will answer that in two parts. Today for a company like Bajaj Auto, labour cost is – the salary of the managing director to the watchman – is only 4 percent of sales. Even if I get rid of 10 percent of my people, I am going to save only 0.4 percent. Is that 0.4 percent in EBITDA playing to the galleries of Dalal Street more important than the jobs of a thousand people and the well-being of their families? I don’t think so. That is not the measure by which I would like to run my company. That is one part.
Secondly, as I already said, it is a difficult situation. I don’t think, I am at variants there with the rest of the industry. There is a difficult situation. We want to grow by 10 percent, we don’t want to degrow by 7 percent. So my submission to the government would continue to be in two parts. One is don’t make a difficult situation worse by things like registration hike and two, because with BS-VI there is going to be a significant hike in costs. And more importantly, at least in terms of two-wheelers and three-wheelers, I would submit that these are not luxury items. These are things the ‘aam aadmi’ requires. So the government should seriously think whether 28 percent or 18 percent is the appropriate rate.
Beyond that, all I would say is even if we are not going to have growth for some period of time, whether it is six months or two years, how does it matter? This is such a large market, it is the largest two- and three-wheeler market in the world. And I keep saying go beyond the borders of India, there is whole world out there. The global market is bigger than the Indian market. It is the job of every enlightened management, it is our responsibility to be a global player as Dr Panagariya himself proposed. I remember when we organised the Champions of Change on behalf of the PM two years ago, one of the main themes was to create global markets for Indian companies. Now all that is lost in this argument.
So you are saying that the industry must focus on substituting the fall in domestic sales with positive trends in exports. Would you also welcome this clarification that has come from Nitin Gadkari, who said yesterday that they were not planning to set any deadline for electric vehicles? Piyush Goyal was also telling the industry that what Niti Aayog was proposing was not the policy view of the government?
As far as Nitin Gadkari is concerned I am extremely grateful to him because from the first day when I approached him with my anxiety about this issue, he has been very clear and supportive. As far as Goyal is concerned, I met him more than once on this issue and he has also been clearly supportive of the industry. He has always assured us that nothing disruptive will be done. But as I have said, when the prime minister himself has put the issue to rest, I think nothing more needs to be said on this.
The only thing I would say in response to your question is that as an industry person we cannot just ignore or laugh off what Niti Aayog says because the PM is the chairman of Niti Aayog. So when Niti Aayog or Dr Kumar or Amitabh Kant says something, we have to take it seriously and I think we were correct to take it seriously.
My final set of questions. Are you also concerned about inventory levels at dealerships for two-wheelers. FADA has spoken about serious concerns in the two-wheeler space that there are about 60-65 days of inventory in the space ahead of the festive season. What is your own outlook on the festive season going ahead?
I am completely with FADA on this, in fact I would plead guilty and say that the two-wheeler industry has not done enough to reduce dealer inventory unlike perhaps the passenger car industry, I don’t know about the commercial vehicle industry. In fact, I would say that even until last month according to data that we have on wholesale and retail -- motorcycles I am talking about, I don’t know about scooters -- dealer inventory has perhaps gone up by another 100,000 units, so this is headed in the wrong direction. I can only submit that Bajaj Auto is not guilty of that. I think the way out is very simple, there is a festive season round the corner, and definitely sales are going to move up. I think all of us would do well, at least this is going to be our strategy, I cannot speak for anyone else. We are not going to push up wholesale as we do every year in the festive season. We are going to keep wholesale more or less similar to where it is today, may be a tad higher depending on how good the festive season is and we are going to use the festive season to completely correct the stock at the dealerships.
I know as much about how to fix the economy as the finance minister would know how to fix a motorcycle. So I am not a person to give ‘gyan’ on economy. Dr Panagariya and others are available for that. But I would only say again from my experience that today every KTM, every Ducati, every TRIUMP is looking at India, wanting to come here, appreciating the fact that we are a large market and we have great competitiveness when it comes to cost and quality. So if Indian companies in this segment or this sector cannot leverage this and create a name for India worldwide and a big business for themselves, then it is an opportunity that we are losing and I don’t think any stimulus is required to harness this opportunity.
The auto industry has been saying that this slowdown is probably the worst in 19 years and will have a negative impact on the economy and jobs going forward. You have already clarified that and expressed your opinion on that. But today, do you believe that there are larger issues that the economy is facing and what would be your recommendations or roadmap that you may want to offer?