A major reason for the current slowdown in the domestic automobile sector is the regulatory and taxation changes which have led to a substantial increase in the price of vehicles for the customer, Chairman of Maruti Suzuki India Limited RC Bhargava stated.
Auto industry body Society of Indian Automobile Manufacturers (Siam) has said that manufacturers may have to cut FY20 auto sales estimates if the current slowdown continues. While commercial vehicle sales are down 26 percent, two-wheeler sales also dropped 17 percent when compared to the same period a year ago. According to experts, liquidity crunch faced by non-banking financial companies is also a key reason for the automobile slowdown.
In an exclusive interview with CNBC-TV18âs Parikshit Luthra, Bhargava shared his views on the situation and proposed measures to overcome the slump.
Edited excerpts from the interview: We have been speaking a lot about the auto slowdown for the last 10 months. What could be the reason for the current slump?
We have had slowdowns in the past also. In 2008-2009, there was slowdown, in 2013-2014 there was a slowdown, and in the last two quarters of last year when there was a slowdown, it was not a serious slump. The first quarter of this year and July as you just said have seen a different type of figure for the drop in sales.
What is different from the previous year? The major factor for this has been that there have been several regulatory and taxation changes not only by the central government, but by state governments and state government agencies, which has all come together and led to a substantial increase in the price of cars for the customer, on-road price, not the ex-factory price. We were looking at the numbers. These include, for example, the road tax.
Several states have increased road tax from between 1 percent and up to 5 percent of the cost of the vehicle. Now, coming on top of the increases which are inevitable because BS-VI changeover and safety regulations being implemented in terms of anti-lock braking system, in terms of airbag, etc. in any case had come together which could have been staggered. They need not have come together, but those came together.
Then, we had the insurance increases which came on top of that. We have had financial cost going up because the dealers are not getting inventory financing without providing up to 50 percent collateral, which is a cost. The customerâs interest rate is going up despite the repo cuts and they are needing to pay up to 20 percent deposit, which was barely 10 percent earlier.
You are saying that a large number of policy changes over the last one year and crunch in liquidity are impacting sentiment on the ground?
Both have come together to make it difficult for the customer.
How should one address this? As a veteran of the industry, what would be your recommendation?
Now some of these things could still, if the states recognise the importance, be staggered to the next year. For example, the road tax increases, why do it this year?
You mean registration or road tax?
The road tax. Registration is still a draft notification; that in any case should be postponed till the crisis is over. I am talking of the road tax, which is the 1 to 5 percent increase in road tax; this has a major effect on the customer. If the car costs Rs 10,000 and you have a 3 percent increase in road tax, the customer is paying Rs 30,000 as extra road tax; it is not a small amount of money.
What about goods and services tax (GST). Most dealers, most original equipment manufacturers (OEM) say that GST at 28 percent is hurting their sales and should be reduced to 18 percent. The government is of the view that GST is not the problem here, there is a problem with liquidity. They are also blaming OEMs for piling up inventory on dealers and not bringing in BS-VI vehicles on time?
On GST, industry has made a representation to the government. Beyond that, what is going to happen on GST, whether it will be cut, will not be cut, it is something which is futile to speculate because it is totally a decision of the GST Council and of the finance minister. I think the finance minister is fully aware of the crisis. However, what the finance ministry and the finance minister consider to be the appropriate solution, has to be worked out by them. There is no point speculating on that.
What you said about BS-VI is not of course true of Maruti. We have already launched six BS-VI vehicles including the Ertiga. If you look at the petrol vehicle sales, these constitute about 70 percent of petrol vehicle sales. So, before the middle of the year, in the first six months, we have already covered 70 percent of the petrol. Diesel cannot be done within this financial year because there is no diesel fuel and diesel BS-VI vehicles cannot run on BS-IV fuel. Petrol BS-VI vehicle can run on petrol BS-IV fuel. So there is a difference and that is why we are doing the petrol vehicles, and the diesel vehicles will not be done this year.
To ask you about the larger problem that the industry is facing, if you had to rate these recommendations in the order of priority, easing liquidity at the NBFC level, removing these collateral restrictions when it comes to inventory financing, slashing cess or GST, where would you put this?
Some things are within our control, some are not within our control. So there is no point of my saying anything about things which are not within my control. However, inventory financing, we have already taken up with the banks and some of the banks have agreed that instead of a blanket requirement of collateral, they will do it on a case-to-case basis; where a dealer has a record of having followed all the rules, made payments in time, no default, and no divergence, there is no point in asking him to give collateral because he has a perfectly good credit history.
Where dealers have issues of default or some other things, it is a different issue. However, 80 percent of the dealers at least will fall in the first category, so why penalise them because some 20 percent or something have done something wrong. Banks have recognised that and they are being pretty quick to recognise that. Banks are already cutting down on interest rates, at least two or three banks as you know have dropped, not adequately, but some drop.
On customer finance, they again have to look at more on a case-to-case basis or as a class of vehicles, which class of vehicles have high default, which class of vehicles do not have default. Why would you penalise the vehicles which do not have any significant default just because some other class of vehicles has default or some other class of industry default? That is happening. That is in our control, so we have raised it with the banks, we have convinced them of the logic of what we are saying, and they are taking action.
Somewhere this whole question of staggering of the things, which are still possible to extend, has to be taken up by the government because it is only a question of postponement, policy announcement. Donât do all policy announcements which have a financial impact on the customer together.
Do you think that transition to BS-VI, new insurance norms, draft notification on registration, all of these new norms that have come into place over the last one year have somehow also confused the consumer?
I am not sure what confusion means, but the fact is it puts a big burden on his pocket. Indian customers by and large are not guys with a lot of surplus money and if you suddenly say that the total cost of buying a vehicle is gone up by Rs 20,000-25,000 he thinks should I buy now or should I wait till I get a couple of more increments.
Do you see a reversal in the slowdown?
I think there are two or three factors which will now come into play. The base effect will come into play from the third quarter of this year. This quarter will not be there, but when you come to results for the October-December quarter, there will be a base effect which will make the situation look better; whether car sales go up substantially is a different issue, but at least it will look better. The impact of some of these financial measures â banks and things, I think will come into play in the next two or three months.
The BS-VI and BS-IV thing will also play out by the end of December because no manufacturer can afford to keep manufacturing BS-IV after December because if you make after December, the risk of not selling it and not registering it by March is very high. So, very few people will take the risk of manufacturing BS-IV after December.
Can we take it that MSIL will completely stop BS-IV production by end of December?
I think maybe a few vehicles, but by the end of December or sometime in the early part of January, we will have completed the changeover completely.
And heavy discounting to clear present inventory?
We do not have that kind of inventory. I think this feeling that people have built up, large inventories of BS-IV, we do not have large inventories of BS-IV. The only place where there is some inventory is in the diesel Brezza because there an impression has been created, I am not sure how, but it has been created, that the Brezza as a model is going, which is not true.
I do not blame the customer for it because till now we never announced that there is going to be a petrol Brezza coming early in the next calendar year. So early 2020 we will have a petrol Brezza. So, it is not that the model is getting discontinued, the engine will change. So, customers who might have been feeling that this model will go and the parts will not be available, service will not be available, they should realise that this model is not going anywhere. It is going to continue, but in a petrol engine, that is all.
What about the future of diesel vehicles for Maruti Suzuki?
Diesel vehicles have both pluses and minuses and we are not quite sure how the customer will behave. BS VI diesel vehicle is a clean vehicle but the cost goes up significantly. A petrol hybrid costs as much as a diesel BS VI and gives roughly the same fuel efficiency. So, what will the customer prefer? May be both can be done but diesel will have to be not in the 1.3 litre, it will have to be a bigger engine. We are looking at that and possibly we will have a bigger diesel engine vehicle coming later sometime.
In the next financial year may be?
I am not sure of the timing. It is not something which is imminent, so there is no point even talking about it, the customers shouldnât start thinking that a bigger diesel vehicle is around the corner, it is not.
About the industry slowdown, there have been production cuts, Maruti Suzuki has also brought about production cuts. To what extent has it affected the work force - the permanent work force and the temporary work force?
Permanent work force doesnât get affected. What happens is that when the contracts of the temporary workers come to an end and there is a demand downturn, those peopleâs contracts are not renewed. That is what has been happening. When the demand picks up, those guys are again called back. But the real impact is not on the labour in the factories, it is the impact on employment, which rises after the vehicle leaves the showroom. If you look at the employment possibilities a car generates -- drivers, training of people to drive and learn, get licences, financing, insurance, petrol dispensation, repair service and logistics â they get affected.
The entire value chain gets affected.
The whole value chain goes on and the car lasts for years and years and people always have something happening to the car.
We donât look at that as part of the value chain of job creation but actually if you look at all manufacturing -- manufacturing is the biggest creator of jobs. Amongst manufacturing, the automobile industry, whether it is cars or trucks, is very heavy creator of employment.
Trucks employ or create employment for a large number of people.
So you feel that this is only transient or you feel that there are larger problems in the economy which are leading to this slowdown?
No, I think this is transient. I donât think there is any major problem in the economy at all. I think this transient problem will go away in a few months. I think the government also has realised that this is a serious matter, with the prime minister making a statement.
I wanted to ask you specifically about that. The PM said that there should be no confusion about this, no speculation, there is a place for both technologies electric vehicles (EVs) and internal combustion engines (ICE) to grow?
Now, people have thought that the government was interested only in electric vehicles.
So the PMâs statement gives clarity?
I think this clarifies that. That this is not the only thing which government is interested in, there is absolute place for both types of vehicles and all kinds of technologies.
My final two questions now, Maruti has always been betting very heavily on CNG vehicles, you have six CNG vehicles already in your portfolio including the Ertiga, what is the future for CNG, are you going to continuously push hard on the CNG front?
Our CNG vehicle programme is essentially related to what the government is doing in this sector and what the customer does because ultimately I have to sell it to the customer. The governmentâs efforts to build the infrastructure for CNG distribution has got highly intensified. Minister for Petroleum and Natural Gas Dharmendra Pradhanâs announcment that India would be having 10,000 CNG outlets by 2030, PM opening a whole lot of CNG stations and things like that. So the government is very clear on pushing the CNG infrastructure for mobility.
The customer so far has shown the liking for CNG. So we will continue to follow that route and try and make CNG vehicles as acceptable to the customer as possible and as many as possible. Small cars particularly are certainly absolutely ideal for CNG conversion. We do intend that all our small cars will get converted to CNG. It is because of BS-VI engineering going on, this has slowed down a little bit but once the BS-VI programme is over, they can put more resources into CNG. So that will happen.
Also at some point, the government should look at how to make CNG kits cheaper, how to make CNG cars safer because there is a whole lot of retrofitting going on. For every car we sell, I think about three cars are retrofitted. They are all done with imported parts and they all are not that safe because there have been a number of accidents. So we feel that the CNG car should get a goods and services tax (GST) cut, so that the vehicles from the factory can compete with these retrofitted ones. There will be Make in India, a lot of manufacturing of the kits will start in India instead of importing these kits.
My final question is about electric vehicles. The government has pushed for EVs in the budget. The GST Council has reduced GST on EVs to 5 percent, you have got the FAME subsidy as well. How does Maruti Suzuki see this? You have got one small car that would be launched next year which will be an electric vehicle. What is the future for electric vehicles at Maruti Suzuki?
At the moment the small electric car is only targeted at the aggregators â Uberâs and Olaâs and other players, they are not targeted at private individual buyers. The government in the FAME scheme has also left out private buyers because I think there is a realisation that with todayâs technology on batteries, in terms of cost, in terms of infrastructure, in terms of charging time, electric cars are not likely to be acceptable to the customer. However much I may want to promote larger sale of electric cars, ultimately the customer has to buy them and find them acceptable. So, that is not likely to happen for some time.
Mahindra has announced that they would be launching three electric vehicles till 2021. Does Maruti Suzuki have similar plans?
At the moment this is the only car. Bigger cars will get launched in future as we develop them. For smaller cars, there are problems of affordability, problems of range and problems of infrastructure that need to be resolved because the private individual is not a risk-taker. He is not willing to buy a car and then find that he cannot use it, it is too big an investment. Our experience is that a small electric car, the cost of that with todayâs technology, is more than double the price of the ICE vehicle. This perception that you will get the WagonR at Rs 5-6 lakh, I do not know where this has come from but it is not true.
So, only one car?