Carmarkers invested in cost-cutting during the pandemic, but it needs faster economic growth

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Though the automobile industry has a huge order book, which it is unable to fulfil because of a shortage of chips, the long-term growth prospects of the industry do not seem to be upbeat unless the economy grows much faster and the tax burden on cars is reduced.

Vikram S. Kirloskar, the chairman of Toyota Kirloskar Motor described the spurt in demand after the second Covid wave in April and May as “fantastic” in a podcast interview I did with him for the Confederation of Indian Industry (CII). Looking back at the past 10 years, however, he said “demand is constrained.”

Only in three of the past 10 years have annual car sales been above three million; otherwise, they have been between 2.5 million to three million annually. Annual exports have ranged between 6.5 to 7.5 lakh. Projections about the market growing to double the size have not fructified. Only in three of the past 20 years has the economy grown at 9 percent, which is the rate that is required to produce incomes for a car market that can sustain more than the three big ones who currently have a 70 percent share, most of it in the B segment, which is a notch above the smallest cars. This and not just their inability to address consumer preferences may be a reason for producers like Ford and GM exiting the market.

The other reason may be high taxation. The import duty on cars costing $40,000 (Rs 30 lakh) and above is 100 percent. For those costing less it is 60 percent. GST ranges from 18 percent to 28 percent. In addition, there is a cess of 1 percent to 22 percent. For vehicles of 1,500 cc and more, GST and cess add up to 45 percent. The government seems to be making more money from cars than the car makers themselves. The high cost of ownership is complemented by the high cost of operation as 56 percent of the price of petrol and 47 percent of the price of diesel are taxes. If taxes were halved and volumes doubled, employment would increase by eight to 10 times, says Kirloskar.

Of course, for a segment of buyers price is not a deterrent. About 11,000 Toyota cars were registered in September – double the number over September last year and most of them were Fortuners, which is an expensive car. This is an indication of the widening income divide. “People who have money have more of it. We need to watch the other side of the pyramid,” Kirloskar said.

Pandemic time was an opportunity for car markers to recalibrate their cost structure. Work from home and less travel by officials saved money as did lower interest costs (partially offset by higher steel and aluminum prices). Kirloskar says Toyota did not reduce salaries or staff but he admits that the company invested in “low-energy automation.” This may reduce hiring in future.

The focus of the car industry has also expanded. Earlier it was on cost, quality and on-time delivery. In the past, the quality of Indian manufacturing improved a lot from Japanese practices like ‘getting it right the first time, every time,’ because re-works add to cost. Reducing the number of defects to a few numbers per million rather than a few percentage points also brought down unit costs. Quality circles and suggestion box schemes gave shop floor workers a voice and enabled incremental but continuous improvements, which added up over time.

Car makers are now trying to deliver on environment and safety aspects, says Kirloskar “because our customers demand it.” Since energy is a big item of cost, Toyota has been investing in solar energy and uses very little fossil-based energy for its manufacturing operations. It has also replaced expensive industrial water with own sources by recycling, reducing usage, and harvesting the rain. Kirloskar says it only uses treated municipal water in the canteens for “psychological reasons.”

Is there a technological overhang over the market and will the inevitable shift to electric vehicles in the foreseeable future constrain demand for petrol and diesel vehicles? Are buyers opting for pre-owned cars in the interim? Kirloskar says demand for pre-owned cars is increasing because owners are replacing cars them faster than earlier, though not as fast as in the developed markets. As for the shift to electric, he says, it must result in reduced emissions. For a country like Norway which produces electricity from wind, the shift will result in net carbon reduction but if India which produces 80 percent of its electricity from coal moves to electric vehicles, it would only be shifting the incidence of emissions to where the power plants are located without making a difference to the load of emissions released into the atmosphere. Flex fuel s and ethanol blending would do more good, till the country’s fuel mix shifts to renewables.

Digital technologies have gained traction during the pandemic by enabling working, shopping and entertainment from home. Will it change the way cars are sold?. Google India’s head of automotive said footfalls to dealerships had been declining for three years before the pandemic, according to a press release of FADA, the federation of automobile dealers associations. The pandemic accelerated the trend.

Mercedes Benz has announced that it will sell its (luxury) cars directly to buyers, relieving its dealers who were affected by falling sales, of the cost of holding inventory. Dealers, now called franchise partners, will do local marketing and market development.

Kirloskar says Toyota has no intention of following the German automaker as buyers like to be reassured by dealers. Rather, it will continue to use digital technologies to improve quality across its suppliers by sharing skills and knowledge. About 80 percent of its suppliers have achieved zero defects per million, Kirloskar says. The use of digital technologies to improve quality and resolve customer issues has a greater payback than its use in selling cars.