Finance minister, Nirmala Sitharaman’s comment on the auto sector slowdown opened an entirely new segment of humor on the Internet by bringing in the millennial angle in the auto slump. Twitter users had a field day after her remarks on the slowdown. Does Finance Minister's comment makes sense or was it completely off the hook?
Let’s do an autopsy of the entire situation and figure out if millennial bashing should be done or not.
What was the FM’s take on the auto slowdown?
Recently, the FM pinpointed Ola and Uber as one of the factors for the slowdown, “Millennials don’t want to lock themselves up with EMIs on auto loans and hence prefer Ola or Uber or metro (trains).” There has been a shift in the attitudes of millennials who now choose cab aggregators leading to a reduction in the aspirational value of owning a car.
This incited Twitterati to react sarcastically on finance minister Nirmala Sitharaman’s analysis of the slowdown. With #SayItLikeNirmalaTai and #BoycottMillennials, hilarious tweets showing the reaction of the millennials on the statement took the rounds on social media.
This is not the first time Uber and Ola are targeted as the reason for the failing auto sector in India. A study by RBI also mentioned a few months ago that four-wheeler sales have reduced due to the rise of the cab aggregators.
But, is auto slowdown all because of the pre-owned car segment increase? Isn't it more a function of the country's broader economic worries than of any other factor?
The automobile sector so far:
The sale of vehicles across all categories in India went down to 18.71% and reduced by 22.45 lakh units in July 2019 as compared to the units sold in July 2018. In over two decades, this hit is the worst in the automobile industry.
The industry is failing to reduce the slump even after new models are being launched and deep discounts are given. This has led to production reduction and firing of nearly 2.15 lakh employees in the sector. Original equipment manufacturers (OEMs) have removed about 15,000 temporary workers and the scarcity of working capital has led to almost 300 dealerships getting canceled in the country.
July 2017 was the month that witnessed a sales spike due to the advantages of the Goods and Services Tax (GST). But, soon after, the demand for vehicles dropped due to heavy rainfall and floods in Kerala and other states in India.
What caused the slowdown?
- Inventory Pile-up: The cost of owning a vehicle went up by leaps and bounds with the increase in fuel prices, higher rates of interest and insurance costs. The GST itself is 28% which adds up to the cost. This simply reduced the demand in the market. The festive season also failed to increase the demand and thus, there was a lot of stock pile-up with the dealers. Dealers also needed more working capital but their money was blocked in the unsold stock.
- Liquidity Crunch: The IL&FS crisis in 2018 led to severe liquidity crunch and left no scope of having credit with dealers and customers. Most of the vehicles sold in the rural markets were financed by NBFCs but at higher interest rates due to the crisis. Soon after, the NBFC crisis created more ruckus in the economy and affected the purchasing power of the consumers.
- New Policies: New policies like buying vehicles having the latest Bharat Stage (BS)-VI emission standard compliance is also stopping people from buying vehicles that are not compliant. Some are waiting to get incentives from vehicle makers who will be looking to sell off their BS-IV compliant stocks before the April 1, 2020 deadline.
- Electric Vehicles: The advent of electric vehicles in the industry is also reducing the sales of petrol and diesel vehicles. Adapting to newer vehicle types is essential but this buying behavior is causing the slowdown in the sector.
- Growing competition from the pre-owned car segment: There is growing competition from the pre-owned car market which is also pushing down sales of new vehicles. The passenger vehicles segment witnessed that the new vehicles market grew 2% in FY19 while the pre-owned market saw double-digit growth.
There is a definite cultural and mindset shift amongst millennials but there are other factors that are impacting the automobile sector. There are some ways proposed by the auto industry to reduce this slowdown:
- Reduction in GST to 18% from the current rate of 28%. A price reduction would help boost the demand,
- Infusing liquidity into the system and handling the NBFC crisis
- Clarity on the policy for electric vehicles
- Introduction of vehicle scrappage policy with regard to the BS-VI policy
The shift in the mindset and the economy is evident to all. If the aggregator trend was not disruptive, carmakers would not take desperate measures to cope. The drift in the economy and changing landscape or mindset makes for an interesting follow-up on the auto industry.
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