InvestorQ : I recently read that the auto parts sector is going to lay off nearly 10 lakh employees due to slowdown in auto sector. What are the reasons for Auto slowing?
Arti Chavan made post

I recently read that the auto parts sector is going to lay off nearly 10 lakh employees due to slowdown in auto sector. What are the reasons for Auto slowing?

Answer
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Rutuja Nigam answered.
1 year ago


There is no announcement of any layoff in the auto parts sector but this is a warning given by the head of the auto parts association about potential job losses if the auto slowdown is not addressed. It has also been pointed out that a number of dealerships are shutting shop due to weak demand and piling inventories. There are few basic reasons why the auto sector got into a slowdown.

· The first reason for the auto slowdown was the liquidity crunch in the economy. In fact, these problems were very prominent during 2018. A weak monsoon in 2018 resulted in weak Kharif output and therefore farmer incomes suffered in 2018. It had a major impact on rural demand. Most auto companies including four wheelers and two wheelers rely on the rural segment for incremental sales, which was missing.

· Ironically, steep rise in fuel prices in 2018 also played a role in the weak auto demand. The trend was driven by crude prices globally. As crude touched a high of $85/bbl in the third quarter of the previous fiscal, prices of petrol and diesel crossed the Rs.90/litre mark. That did not go down well with the buyers and they decided to put off buying cars. This led to a serious compression in demand.

· A survey done by CSFB has pointed out that the consumer demand postponement was at its highest in the last two years. The survey conducted by Credit Suisse First Boston in early 2019 underlined the crux of the problem with the auto industry. According to the survey, the tendency of consumers to put off purchase of consumer durables had gone up to as high as 1 year. Nobody wanted to buy a car or even a two wheeler unless there was certainty on economic growth, income levels and on fuel prices.

· When IL&FS started defaulting last year and Dewan Housing sank into trouble, the impact was felt by all NBFCs and auto companies bore the brunt as financing dried up. NBFC crisis was the real negative kicker. Due to their flexibility and market orientation, NBFCs had been driving growth in auto sales. Post the IL&FS default in mid 2018 the NBFC sector was suddenly staring at tight borrowing markets and funding costs up by nearly 150 basis points. That took the cost of funds too high for borrowers. Liquidity was tight and cost of funds was too high.

In a way, all these factors have played a role, but insufficiency of demand appears to be the main culprit. Auto demand may remain tepid unless the government comes up with a smart plan to boost auto sales.