NEW DELHI: Global auto maker s which have rushed to set up factories in India to feed local demand admit they have been tripped up in the last 12 months by the country’s unpredictable policymaking.
After a stellar 2010-2011, when car sales grew 31 per cent year-on-year, the industry has faced a staggering slowdown and radically different buying patterns – bad news for giant complex companies that plan years in advance.
“To say we’ve been wrong-footed would be an understatement,” the head of General Motor’s India operations Karl Slym told AFP on the sidelines of the country’s Auto Expo car show last week.
Shinzo Nakanishi, chief executive of Maruti Suzuki, the Japanese-owned market leader in India, admitted that “many changes have surprised us during the last year”.
The first factor was the Indian central bank’s decision to persist doggedly with an aggressive cycle of interest rate hikes to tame inflation. It raised the cost of borrowing on seven occasions in 2011.
Many customers who rely on credit to buy vehicles have either decided to defer their purchases or simply put them off altogether, meaning the mood of the Auto Expo was more sober than during its last edition two years ago.
In October, new car sales fell 24 per cent year-on-year, the biggest dive in more than a decade, while sales over the full financial year to March are forecast to be flat compared with 2010-2011.
The second major swing has been the switch in demand from petrol-engined cars to diesel, caused by an unexpected change in policy that emerged from India’s finance ministry.
In June 2010, Finance Minister Pranab Mukherjee announced suddenly that the government had deregulated gasoline prices, leaving state-run energy companies free to increase their prices.
Subsidies and regulation for diesel, used by the country’s hundreds of millions of farmers as well as the truckers who transport most of India’s freight, remained in place.
“Thirteen times prices were raised. Each time the gap between petrol and diesel got wider,” Nakanishi lamented to AFP.
Today, diesel costs around $0.40 per litre less than petrol – a huge gap in a low-income and highly price-sensitive country.
Not surprisingly, four out of five buyers now purchase diesel-powered cars, but the industry with its complex supply chains and manufacturing plants was not ready to cope with such an abrupt change in consumer preferences.
The head of Ford’s operations in India, Michael Boneham, said the US giant was unable to produce the number of diesel units requested by buyers from its factory in Chennai.
“I don’t know where government policy is going to go on this issue,” he admitted to reporters last week, adding that the company had been “constrained”.
“We could have been selling significantly more diesels,” he said. Most modern engine manufacturing plants are designed to be able to produce both petrol and diesel engines, but switching from one to the other requires significant investment in new machinery and tooling. – AFP