Car exports move into lower gear as more nations move towards protectionism

India’s ambition of becoming a large competitive base for car exports has hit a speed-breaker as some of the importing nations act to discourage imports by putting in place non-tariff barriers. 

Shipments from the country grew consistently for six years before registering a marginal drop of over a per cent in FY18. This reversal is not an aberration and export of passenger vehicles cars, vans and utility vehicles has seen a dip of more than eight per cent in the first nine months of FY19. 

The two consecutive years of decline comes after exports hit an all-time high of 758,830 units in FY17, registering a strong growth of over 16 per cent. In the following year, however, numbers softened to 747,287 vehicles. The industry has managed to ship 510,305 vehicles in the first nine months of the current year. The numbers will clearly fall well below the 700,000 mark even if it crosses 600,000 units. Surprisingly, all other segments of the automobile industry— commercial vehicles, two and three wheelers— have grown exports at a double digit rate in the current year. Commercial vehicle exports, for instance, has grown at 11 per cent, while two-wheeler shipments have surged 21 per cent.

Exports accounted for as much as one-fifth of sales for passenger vehicle makers in FY17. However, its contribution to sales is now down to 17 per cent. The decline in exports comes in a year when domestic demand has also softened owing to a combination of factors, namely record high fuel prices and a steep increase in insurance costs. Domestic growth has softened from almost seven per cent during the first half to just over four per cent in the nine months. 

The country’s largest car maker and third largest exporter, Maruti Suzuki, has seen its export dip 14 per cent to 77,258 vehicles this year. “The export markets’ business environment is challenging. Export markets are facing challenges like currency devaluation and import restrictions which are affecting demand,” company’s chief financial offer Ajay Seth said after the announcement of second quarter results. 

Maruti Suzuki gets about seven per cent of revenue from exports. The company added that while the rupee has softened with respect to the dollar, other currencies have declined much more, implying that the export market is facing some kind of economic slowdown. It also said that “some kind of trade protectionism” was also visible in many countries in the form of import restrictions. 

The decline is a worry for car makers whose domestic numbers are smaller than exports, as declining export takes away the advantage of economies of scale that exports brings to them. Leading global brands like Volkswagen, Ford and Nissan sell significantly higher volume in exports from India than their domestic sales. American auto major Ford, the second largest exporter from India, has seen its export slip over 11 per cent to 121,337 units, while domestic volume has grown 11 per cent to about 70,000 vehicles. 

In case of Volkswagen, there is a high double-digit decline in both export and domestic volume. Its export has slipped 34 per cent to 46,517 units, while local sale is down 24 per cent to 26,688 units. The situation is similar for Nissan except that its export decline is still in single digit at seven per cent. 

Mexico, the top export destination for made in India cars, has seen a drop in orders. Commerce Ministry data shows that the value of shipments to Mexico declined 20 per cent to $839 million during the April-October period of FY19. “In 2018, higher inflation, higher gas prices, and tensions regarding NAFTA negotiations are all feeding into the volatility of the Mexican peso against other currencies and inflation. The situation is making some consumers choose to hold back from making purchases,” says a report by IHS Markit, a London-based global information provider. Export to South Africa, India’s third biggest destination, is also down five per cent to $400 million. 

Rajan Wadhera, president of automobile industry body Siam, says different companies have different considerations while exporting vehicles. “Some use India as a base for exports and local conditions in some of the export markets affect shipments. Many markets are putting import restrictions and are asking companies to open local assembly plants and add value locally. We need to have some kind of agreement with such countries. This is becoming a new reality,” he says. Countries like Vietnam and the Philippines have increased taxes on import of completely built vehicles, prompting Hyundai to ship completely knocked down units, to be assembled locally. 

The passenger vehicle market in India is not at its peak and companies would want to export more and more. “But they are not able to do so because of the local conditions in those markets. Countries have started applying brakes on imports either to save foreign exchange or to address issues of congestion and so on. The policy will allow imports at some point of time as demand is still there,” says Vishnu Mathur, director general at Siam.