Auto manufacturers may have to effect production cuts in January-February if vehicle stocks at dealers are not cleared by the end of this month. Companies manufacturing petrol cars, two-wheelers and medium and heavy commercial (M&HCV) vehicles are trying to clear inventories before New Year by offering discounts.
Analysts, however, say stock levels are not alarming yet. They attribute the inventory spike to sub-par festive sales in November, when volumes rose a mere 1.79% to 1.5 million units. Besides, December is dull on sales as buyers wait until New Year.
In the M&HCV segment where R2-3 lakh discounts are on offer, inventory levels are now at about six weeks. According to dealers and analysts, this is less worrying than eight-week stocks during July-August. In fact, sales through the fiscal have been sluggish as slowing economic growth, rising fuel prices and high interest rates depressed sentiment.
A Tata Motors dealer said that though companies are compensating dealers, discounting has eroded margins, even as warehousing costs (insurance, rent and interest on loans) have doubled. “Discounts are more than dealer margins; so it's supported by the manufacturer. The schemes are being offered to clear stocks and compete with new players such as AMW and Bharat-Benz. The dealer margin has shrunk from R50,000 to R10,000, and that’s pinching us,” he said.
In a good month, Tata Motors sells about 18,000 units of M&HCVs and Ashok Leyland 7,000 units.
These volumes are now down to about 12,000 and 4,000 units respectively. “Our inventory is in order. The discounts are there because of the sluggish market,” A Tata Motors spokesperson said.
During April-November, M&HCV sales fell 16% to 1.78 lakh units, with November figures alone falling 33% 17,441 units. “We expect a cyclical upturn by the second half of 2013-14 accompanied by lower interest rates,” a Deutsche Bank analyst said.
Industry leaders Tata Motors and Ashok Leyland, who together command 80% of the 3.4-lakh unit domestic M&HCV market, reduced output through the year. “We have done block closures of 2-3 days from time to time at our plants to reduce inventory build-up in commercial vehicles,” the Tata Motors spokesperson added. A supplier industry source said Ashok Leyland too has reduced output at its Pantnagar factory.
Analysts feel M&HCV makers may have to go for further cuts in January if the market continues to be sluggish. A Barclays report after Tata Motors and Ashok Leyland's announced their Q2 results said a marginal improvement in Q3 earnings was expected, but would still be limited due to heavy discounts and inventory levels.
Among passenger vehicles, inventories for many petrol cars and some diesel vehicles have touched 4-6 weeks, with Tata Motors, Hyundai, Volkswagen, Ford, GM and Fiat facing the heat. GM has already reduced output through 'no-production days'. Others may be forced to follow suit.
Maruti Suzuki and Mahindra & Mahindra have seen relative success both on new launches and the popularity of select diesel models. Maruti saw strong demand for the new Alto 800 and diesel models of the Swift, Dzire and Ertiga, while Mahindra's charge was led by the XUV500 and Quanto.
Hyundai Motor India (HMIL) claimed its stocks were in control, as production had already been reduced as per demand. While even diesel models are now on discount, the silver lining is that demand for petrol cars like the Eon is up. “Stocks are at three weeks, which is well below the normal levels of a month's inventory,” said Rakesh Srivastava, HMIL's vice president for marketing and sales.
A businessman with both car and two-wheeler dealerships said, “The slowdown is a concern across the industry. Most car and two-wheeler dealerships have inventories of 4-6 weeks, which about eight months back stood at around two weeks.” This points towards a new trend where high inventory levels have become the norm across the industry, especially compared with last year's.
In two-wheelers as well, Hero MotoCorp is likely headed towards another high stocks situation (like August-September this year). This may force the market leader to again lower production in Q4, FY13. Meanwhile, Bajaj Auto has reportedly already cut output to match the lower demand.