Introduction to Automobile Industry in India

India became the fourth largest auto market in 2018 with sales increasing 8.3 per
cent year-on-year to 3.99 million units. It was the seventh largest manufacturer of
commercial vehicles in 2018.
The Two Wheelers segment dominates the market in terms of volume owing to a
growing middle class and a young population. Moreover, the growing interest of
the companies in exploring the rural markets further aided the growth of the sector.
India is also a prominent auto exporter and has strong export growth expectations
for the near future. Automobile exports grew 14.50 per cent during FY19. It is
expected to grow at a CAGR of 3.05 per cent during 2016-2026. In addition,
several initiatives by the Government of India and the major automobile players in
the Indian market are expected to make India a leader in the two-wheeler and four-
wheeler market in the world by 2020.

Market Size
Overall domestic automobiles sales increased at 6.71 per cent CAGR between
FY13-19 with 26.27 million vehicles getting sold in FY19. Domestic automobile
production increased at 6.96 per cent CAGR between FY13-19 with 30.92 million
vehicles manufactured in the country in FY19.
In FY19, year-on-year growth in domestic sales among all the categories was
recorded in commercial vehicles at 17.55 per cent followed by 10.27 per cent year-
on-year growth in the sales of three-wheelers.
Automobile exports grew 14.50 per cent year-on-year during FY19, while during
April-December 2019, overall export increased by 3.9 per cent.
Premium motorbike sales in India recorded seven-fold jump in domestic sales
reaching 13,982 units during April-September 2019. The sale of luxury cars stood
between 15,000 to 17,000 in first six months of 2019.
Sales of electric two-wheelers are estimated to have crossed 55,000 vehicles in
2017-18.
 Trend Check

India’s domestic passenger vehicle sales had already been falling in this financial
year and the worst happened to the industry when the pandemic took over the
world. India's economy is facing a slowdown. It grew at 5% in drop in private
investment and a banking crisis that has made it hard to access credit - has
weakened consumer demand.
The Indian government is also pushing for a transition to electric vehicles over the
next decade, which some experts believe, has contributed to falling vehicle sales.
As the automotive industry declined for the 10th month in a row in August, car
sales dropped by 41% - the steepest fall in two decades.

The impact of CoVid-19 is explained later in the report.

Not only is India among the most populous countries globally, it is also one of the
world’s largest markets for automobiles and two-wheelers, trailing only China, the
United States, Japan, and Germany. By 2025, it is expected that about 6.7 million
passenger cars will be sold in India.
The leading automakers include Maruti Suzuki, Hyundai Motor and Mahindra &
Mahindra. In 2019, Hyundai, Kian, and Renault were among the non-domestic car
manufacturers to see the highest growth rates.
However, the entire passenger car market in India contracted by over 12 percent
between 2018 and 2019. Maruti Suzuki’s
Alto was India’s best-selling automobile in the 2018-19 season. Munjal Showa has
Maruti as its client so the market share of Maruti is favourable for the sale of our
own products. Passenger vehicles are ranked as the second most important motor
vehicle segment in terms of sales, while two-wheelers continue to be India’s best-
selling motor vehicle category.

Impact of Emission Controls Due to New Regulations

Expected In 2023 & Beyond
The worldwide climate is altering and will continue to alter, in ways that disturb
the planning of regular actions of businesses, government agencies and other
organisations. The indicators of climate change comprise higher temperatures,
altered rainfall patterns, and more recurrent or powerful life-threatening events
such as heatwaves, drought, and storms. These risks from climate change to
humans can be reduced to a large extent by making correct choices. Although
globally the Environmental Protection Agencies (EPAs) declared cars "mobile
sources" of pollution, they are not the only culprits' Big trucks, bulldozers, ships
and boats, trains and even snow blowers also pollute the air.
The exact impact of automobiles on the fragile environment is difficult to guess,
however, hundreds of studies and researches in the past 3 decades have highlighted
the issues caused by the harmful CO2 and NOX emissions from automobiles. As
demand on automobiles to become faster, safer, and lighter it's the same for the
fuel. The residual unburnt fuel in the engine not only reduces the mileage but also
releases CO2 / NOX gas and harmful chemicals into the atmosphere. Particulate
matter, hydrocarbons, carbon monoxide and other car pollutants harm human
health. Diesel engines emit high levels of particulate matter, which are airborne
particles of soot and metal. Carbon monoxide, another exhaust gas, is particularly
dangerous to infants and people suffering from heart disease because it interferes
with the blood's ability to transport oxygen.
Due to the ongoing COVID 19 pandemic, the entire India is in lockdown state. The
only beneficiary to the massive damage caused by the virus has been the
environment. In the capital of India, New Delhi, government data shows the
average concentration of PM 2.5 plunged by 71% in the space of a week -- falling
from 91 micrograms per cubic meter on March 20, to 26 on March 27, after the
lockdown began. Nitrogen dioxide went from 52 per cubic meter to 15 in the same
period -- also a 71% fall. Mumbai, Chennai, Kolkata and Bangalore have been
recorded.

Problem statement for India

There is going to be a serious concern on the diesel car market in India. Indian
diesel passenger car market is around 10 lac cars annually and it has been
gradually reducing. Recently Maruti Suzuki, the biggest carmaker in India
announced stopping of diesel car production effective April 2020. This would
mean a loss of 3 lac cars annually. European carmakers like BMW, Mercedes
though continue to produce their luxury cars, albeit small numbers.
Implementation of BS-VI has increased the diesel car prices by 1 lac on an average
owing to technology upgrades. OEM's have no choice but to implement their
systems on the engine as well as the after-treatment side. Government has given no
respite to them even after COVID 19 disaster. This is a piece of bad news for the
auto sector in India with next inline - implementation of BS-VII probably by 2025.
And this is not all; there is worse news for the auto sector soon.
There are proposals in the works to make Real-Time Emission Monitoring System
(RTEMS) mandatory for all cars from 2023 onwards. The basic concept of
RTEMS is that there is a huge difference between testing conditions in certifying
labs like ARAI and field conditions. Carmakers have been getting away with this
with a lower level of emission controls settings at the controlled conditions in
ARAI. (Remember the Volkswagen scandal!). Volkswagen was able to cheat
because certification tests are conducted on a dynamometer, much like a treadmill
for cars. The software will trigger and operate the engine on `Test condition' mode
during certification which would be vastly different from `On Road' conditions.
Already various tests conducted in Indian roads on random sampling have shown
shocking results that most of the top-selling cars exceed the emissions by 3-6 times
on HC +NOX emissions. To take care of this serious issue, RTEMS could be a
mandatory accessory for diesel cars. This RTEMS device is a sensor-based
automatic data capturing system which monitors emissions on a real-time basis and
feeds into a central computer, so Government agencies can have access to the
emission data any time using Artificial Intelligence and the rogue cars can be
traced.
The cost implications of fitting this device in diesel cars are estimated to be around
2 lacs per car, so effectively diesel cars would be that much more expensive than
petrol since in petrol cars it is relatively easy to control emissions. In India, there
has been traditionally a cost differential between petrol and diesel by around 7/-
per km. This along with higher power demand, particularly for SUVs has been a
driving force for diesel cars sales.

Conclusion
We see a significant drop in the diesel cars market post-2023, assuming the
Government proposal to make RTEMS mandatory for all cars goes through. Due to
the technology limitation and cost implication, the carmakers would not be able to
meet the price expectation of customers. Hence, they will have no choice but to
discontinue the production of diesel cars. Due to the recent COVID-19 pandemic,
there would be added concerns all over on pollution control. The 5 weeks
mandatory lockdown has proven its worth. These would be added pressures on the
Government to keep cities and surroundings clean to enable people to breathe
clean air.
EV will be another option which the OEMs would be motivated to make a shift
from diesel. Overall we see a clear market shift as far as diesel cars are concerned.
Following are drivers of this shift which are witnessed in the Indian market:
Technology limitation to meet stricter emission guidelines for diesel cars
Cost implications - extra cost of around 2 lacs per car is not sustainable in a highly
cost-competitive market like India where around 80% of cars are sold in the price
range of 7.5-10 lacs. Diesel cars are expensive to maintain too.
Environmental factors - pollution is going to become increasingly serious in the
aftermath of the Corona pandemic.
The impact on Tier1 companies making diesel car engine and powertrain
components would be huge. We see companies like Bosch, Denso, Mahle and
several of their Tier2s having a significant impact on their business. Also, we have
to watch the business strategy of Mahindra whose almost 100% passenger vehicle
fleet is diesel-powered today. We see a clear shift of technology from Diesel to
Electric in India.

Potential Impact of COVID-19

The economists are looking at impact of Covid-19 on India’s economy can be seen
by 3 scenarios-
Optimistic Scenario with V-shaped recovery: The pandemic is to be controlled
by June 2020 and the economy starts recovering itself from the 2nd quarter of
FY21 achieving rapid growth thereafter.

Slightly Optimistic Scenario with U-shaped recovery: With the problem in

supply chain and demand, the economy starts normalising in the 4th quarter of
FY21.

Pessimistic Scenario with New Low level of Normal: With the steep decrease in
demand and production cut, the situation starts easing in FY22 after which the
economy revives moderately
Scenario 1: The Optimistic Scenario
(V-shaped Recovery)

Quarter 4 Quarter 1 Quarter 2

Quarters FY20 FY21 FY21 Quarter 3 FY21

GDP growth 4% - 4.2% 2.5% - 2.8% 4.1% - 4.3% 5.5% - 6.8%

Rises but moderates around

Inflation Moderate Low Low target rate

Scenario 2: Somewhat Optimistic Scenario

(U-shaped Recovery)

Quarter 4 Quarter 1-3 Quarter 2\4

Quarters FY20 FY21 FY21 Quarter 1 FY22

GDP growth 4% - 4.2% 2.2% - 3% 4.2% - 4.4% 5.5% - 7.5%

Rises above 4%, moderates

Inflation Moderate Low Moderate by Q4 FY21

Scenario 3: The Pessimistic Scenario

Quarter 4 Quarter 1-4 Quarter 1-4

Quarters FY20 FY21 FY22 Quarter 1 FY23

GDP growth 4% - 4.2% 2.2% - 3.5% 4.4% - 4.5% 5% - 6%

Inflation Moderate Moderate Moderate Moderate

Covid 19 is going to have an impact on economy through the
following vectors:
Supply Disruption: It is going to adversely affect the supply of raw and
intermediate materials from China.
About 18% of the automobile components and around 30% of tyres are imported
from China for automobiles production.
The two wheeler segment is going to get affected the most as ⅘ of imported
components for two-wheelers are from China. Even the BS-IV rollout is largely
dependent on imports from China. This might not affect the companies in the long
run as the disruption is mere temporary.

Global and Domestic Demand: Falling share price, low profitability, production
disruptions and loss of employment are going to affect the domestic as well as
global demand of the automobiles. The current scenario has increased the
unemployment rate in Indian urban areas from 8 percent to 31% which is going to
affect the demands majorly.

Stress on Banking & Financial Sectors: High unemployment and household

leverage will lead to high consumer loan default. Rising bond yields leading to
reduced bank margins, depreciation of rupee against dollar, rising consumer loan
default are creating a stress on banks and capital markets.

Falling Oil Prices: Lower oil prices can act as a boon for the automobile industry
as vehicle ownership becomes more attractive and affordable when oil prices are
low.
Alternatives for Automotive Industry:
The industry is inventory sufficient for a short time but lack of some components
can affect the manufacturing.
The companies can look upon sourcing the components locally or from other
countries such as Germany, South Korea, Japan and Thailand.
The change in supply chain can be much costlier and could not be able to meet the
demand.
“The impact of covid-19 coupled with the earlier slowdown in the economy is
going to affect the sector doubly.”

There are marginal external factors affecting the business in India, such as impact
on China. The exports of the intermediate goods which India was getting at a
comparatively cheaper price will now get obstructed. The report shows that a 2%
reduction in the exports of intermediate inputs will bring about 34% impact on the
automobile sector.