Passenger vehicle sector has extra capacity of 1.66 million units

Last financial year, leading automobile manufacturers together recorded capacity utilisation of 63%

Most Indian passenger vehicle manufacturers are poised to take advantage of any uptick in sales in the next financial year having built up large capacities.

These companies had invested in capacities earlier to cope with sales growth of around 8-10 per cent per annum. Passenger vehicle sales, however,  grew by 2.15 per cent in 2012-13 and declined by 6.05 per cent in 2013-14.

The car industry--excluding M&M, which declined to share its installed capacity, and some small players--is saddled with excess capacity of 1,663,811 units, nearly 60 per cent of the total sales in 2013-14. In the last financial year, leading automobile manufacturers together used 63 per cent of their capacity.

”The market is expected to witness recovery during the second half (of 2014-15) and end the year with almost a flat to moderate sales growth. A number of new launches this year will also provide some boost to passenger vehicle sales,” said Rakesh Batra, partner and national leader (automotive practice), Ernst & Young.

Industry doyens like R C Bhargava, chairman of Maruti Suzuki, estimate the 1.66 million units excess capacity will feed sales growth for the next three to four years.

This, of course, does not include the capacity expansion announced by various automobile companies, including Maruti Suzuki and Ford India. While the American car maker is set to add a capacity of 240,000 units in Gujarat by the end of 2014, Suzuki will invest Rs 3,000 crore to make capacity of around 100,000 units operational in 2016-17.

“We expect passenger vehicle sales to return to strong growth in 2015-16. However, a lot depends on the outcome of the upcoming elections, economic stability and policy initiatives of the new government to drive the industry growth,” Batra said.

“While the long-term potential for the Indian automotive market remains positive, the significant challenges witnessed in the last few years have resulted in industry stakeholders reworking their India strategy as they increase their focus on vehicle exports, rural penetration, deep localisation and dealer profitability,” he added.

Vishnu Mathur, director-general of the Society of Indian Automobile Manufacturers (SIAM), said fresh investments were unlikely over the next couple of years.

“Last year, investments to the tune of Rs 20,000 crore were made by the automobile industry. Fresh investments in capacity building are unlikely. However, investments in developing new products, refreshes, and research and development are an ongoing exercise and will continue irrespective of any slowdown,” he pointed out.

Faced with the sharpest sales slowdown in over a decade, leading automobile manufacturers cut production by around 5 per cent in 2013-14.

"Last year was one of the most difficult years for the industry. The business environment was tough due to low growth of the economy, high interest rates, fuel prices and low sentiments,” said Vikram Kirloskar, president of SIAM,  

Sluggish sales and production cuts resulted in retrenchment of around 100,000-150,000 temporary and contract workers across the automobile supply chain.