The auto rut

GUEST COLUMN

We would love to give a buy on the auto sector, but considering the auto shows, luxury car launches, Kamal Nath's pitch at the sourcing summit, sector consolidation and all that exuberance built around the industry oblivious of clogged roads, pollution and global warming that we remain on a back foot still waiting for the sector to bottom.

The auto sector is in a rut and is one of the worst performing sectors of the last decade. Here are some statistics. Tata Motors returned 15 per cent over the last 10 years, Maruti gave 16 per cent over the last four years, Mahindra and Mahindra did a better job as it gave 64 per cent in the last eight years. And one sector component Ashok Leyland returned 0 per cent returns in the last 10 years. This is dismal performance and the hype around the sector still does not make things easy as we head into the decade low.

If all of this looks surprising, here are some more facts. The BSE Auto index has underperformed the Sensex, the banking sector for more than two years, the index never outperformed the capital goods sector in the last decade, oil and gas performance negated the auto performance.

And if all this was not enough, auto has started underperforming the pharma sector and in the last two years FMCG companies delivered more than auto stocks. So then why so much fuss about auto? There are many reasons. We love our cars, and cars have reached a cult status now, we make pictures about them, it's a status symbol which has pushed us to a socionomic extreme which left economic sense behind.

Some sense, which David Ricardo wrote about is his work on comparative advantage. We should do what we can do best. No wonder world over we are trying this out, making cheaper cars, better cars, faster cars, selling Romanian Dacia Logans in India and Indian Maruti Swifts in Romania.

Consumerism knows no economics and that is why all this talk of compounded growth rates and auto sector value falls on face, if you raise a few simple red flags of economic slowdown, rising fuel prices, lack of infrastructure and global warming. If German car manufactures are floundering on these aspects, we don't know where Indian manufactures stand in the new paradigm shift which stares us ahead.

Cautions are never raised as profit driven approach is too myopic. And with the positive factors linked with other auto-related industries - repair, road transportation, insurance, finance and rental, the expectations become clearer and higher. Global sector leaders are already in rough weather.

The DJ US Auto Parts index has already lost more than 50 per cent since 2000. And news like "U.S. car sales fell and oil traded near $100 a barrel" is regular. General Motors is facing the eighth consecutive decline in annual US sales recently and is focusing on its fast growing international market. And there is no way the majors have, but to go east. Global manufacturing is shifting to low-cost China.

No wonder a recent Bloomberg report cites the China risk after the recession risk for carmakers. If China goes down, not only the number two auto market slows down but also those that supply commodities to china. Now you can see why carmakers are rushing to India, as it's more a question of bottom-line and sales not of climate or future.

Not all automakers care about climate or about the energy constrained future. This is why we can't expect automakers to understand that India's energy needs are a bigger strategic question than the auto sourcing summit strategy. We are too focused on cars, when a sizeable proportion of us still live on a dollar a day. Indian autos are not green, the reason many of them might not survive.

And by the time they wake up to biofuels, more debates may emerge about how green biofuels are anyway.

Some thinkers believe that for a sustained solution individual behavior should change. But how can you change individual behavior? We herd. How can we make them change their car habits? When there is so much done to make sure they stick to the same habits.

Today one out of three people on the internet go to an automotive site on a monthly basis. And all the hype with Deming prize winners keeps the positioning tight. Profitability is so much at stake that there are cases of abundant copyright infringement.

The auto boom is not only the start of a prosperity boom but it also is a leading indicator of slowing prosperity. And the way it seems, the rut is far from over. This is why we feel, the time ahead might trash some of those compounded growth numbers, as markets are changing faster than automakers can catch up with.

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The author is CEO, Orpheus CAPITALS, Global Alternative Research