Indian automakers are stuck between stricter emission laws and falling sales

• A report by credit rating agency Fitch ratings says that the challenges are likely to persist for Indian auto manufacturing companies.
• As carmakers have to comply with BS VI norms, it will result in increased production costs.
• Auto sector has been undergoing a massive slowdown, with the first quarter results leaving top companies worried.

The Indian auto industry has been witnessing one of its worst ever phases with sales slowing down for over 10 months now. But their troubles are far from over. There is more pain ahead in the form of new emission norms.

Now, they also have to comply with BS-VI norms by March 2020. After this, the sale of older models will not be allowed, which is not good news for those holding onto huge inventory. It also means that the car companies have to invest in switching technologies.

“The additional components and design changes will raise production costs by 10%-15%. This could squeeze automakers' profitability in FY21 if automakers are not able to fully pass on costs to buyers,” said a report by credit rating agency Fitch.

Automakers are already on the backfoot and offering heavy discounts ranging from 8% to 27% depending on the model. Their ability to pass on increased costs seems to be bleak.

Maruti Suzuki is leading the way with most ‘total cash discounts’ offered to consumers. While Alto models saw an 8% increase in discounts as compared to June, the Celerio Automatic and Dzire Diesel versions saw a steep increase of 23% and 27%.

Most auto manufacturers reported their worst sales report for the first quarter in a decade.

Auto companies like Tata Motors, Maruti Suzuki, Mahindra & Mahindra and Hero Motocorp, have all been cutting production to align with the tapering demand.

And these woes will continue. “Subdued demand conditions that led to weak performance by Indian automakers in the first quarter of the financial year ending 31 March 2020 (FY20) will likely persist, adding to the challenges from the implementation of stricter emission norms under BS6 from April 2020,” the report says.

Maruti Suzuki’s profits fell by 27.3% for the first quarter. It sold 109,264 units in July 2019, registering a steep 33.5% fall in sales compared to the same month in the previous year. On a monthly basis, its July sales have fallen by 12.3% from its June.

“My belief is that we are near the bottom of the downward cycle and the economy, and car sales should start to accelerate in the near future,” Marutii Suzuki’s chairman RC Bhargava said at the company’s annual general meeting. Maruti Suzuki has also cut down on 3000 contractual jobs.

Tata Motors’ sales in the domestic market dropped by 34% at 32,938 units compared to 50,100 units sold over last year as subdued demand continued in July 2019.

The report said that the lowered sales was due to “the constrained liquidity at non-bank lenders reduced credit availability to buyers and the cost of ownership rose due to new regulations mandating enhanced vehicle insurance cover and additional safety features”.