Interview with Rakesh Batra, National Leader, Automotive Sector, Ernst & Young LLP

Company Description: Ernst & Young (EY) is one of the largest professional service firms in the world and one of the leading accounting firms. Ernst & Young is a global organisation of member firms with 152,000 employees in more than 140 countries, headquartered in London. It is a global leader in assurance, tax, transaction and advisory services.

Do you expect this fiscal to replicate the similar story as the last one in the automobile industry?

I think 2013-14 would be a difficult year also. In terms of numbers, it may turn out to be similar or maybe slightly better than the last one. But I don’t think that is going to be counted as a significantly better year. And the reason for that is we are still not back on the growth trajectory in the overall economy perspective. It is affecting consumer sentiments and people do not really want to spend on discretionary products like new vehicles. All of that is resulting in a situation that we see now. Since the economy is going to take a little bit of time to get back on the path of revival and there is an uncertainty of elections (this year), we will continue to see a similar outcome vis-à-vis last year.

The Indian automobile industry made an investment of `22,000 crore during last year. Why are companies so upbeat in making fresh outlays?

If you look at the growth rates after the global crisis in 2008, we had two years of very robust growth i.e. FY 2009-10 and FY 2010-11. Furthermore, FY 2011-12 also had some moderate growth. I think nobody really expected that the market will slow down in FY 2012-13. That was primarily because nobody anticipated the economy to come down to 5pc growth rate. Moreover, we had some policy related issues like FDI as well. These were not specific to the automotive industry but in other sectors like retail, etc. So a lot of these investments take time when it comes to building a new plant, acquiring land, installing machinery, etc.  These investments were already at various stages of deployment and in anticipation of continuing growth. But two things have to be kept in mind.  Firstly, there is a fair bit of cyclicality in the automotive industry that has to be factored in. Secondly, the FY 2012-13 (no growth) was completely unexpected. Everyone kept hoping that things will get better which unfortunately didn’t happen. Probably, now we can see some slowdown in investments. But clearly from a mid-term perspective, if you look out for 2019-20, this market is going to grow because of the fundamental factors like the need for personal mobility, absence of world-class public transportation system, etc. 

Indian commercial vehicle (CV) sales are expected to grow at a CAGR of 15pc in the next five years  to reach 1.6 million units by 2016-17, as indicated by an Ernst & Young report. What would be the key growth drivers?

That was a report that we have released last year and did not take into account what we are seeing in FY 2012-13 wherein we are seeing significant de-growth in volumes. But the growth drivers of CVs are primarily the economic growth, GDP, growth in agricultural production, augmentation of manufacturing activities. And all of these are areas where even from a policy level we want to have a greater thrust to industrial production to bring more balance between manufacturing and services in the economy. So I think those were the fundamental drivers that have not changed and are still intact. Obviously, there is some sort of cyclicality that we are experiencing this year. The forecast might change this year based on what has happened in FY 2012-13. As long as the economy is growing with the concurrent surge in investments, manufacturing activities, and agricultural production, the demand for CVs should reach that level. And let’s not forget the fact that the figures that we have mentioned is that of the CV industry per se that also includes small commercial vehicles which are growing much faster than the medium and heavy commercial vehicles because of its hub-and-spoke model. So if we consider GST implementation in two years, the 1.6 million-target looks quite attainable.

SIAM has vehemently opposed FTAs with Europe for CBUs. Do you support their stance? And can you share your views too?

I think that’s (SIAM’s standpoint) a right solution because we want to encourage more manufacturing operations in India. An automotive sector is a major component of the overall GDP of this country at 5-6pc. According to Automotive Mission Plan (AMP), it is expected to grow to 10pc by 2016. So a 10pc contribution is a significant component of GDP and a significant component of the manufacturing sector. Furthermore, the country has a well-developed supplier infrastructure and a formidable engineering base.  At the same time, there are a lot of resources available which provides a cost-competitive platform to global automakers to design and manufacture vehicles. So importing vehicles certainly does not support this high-level objective of getting more manufacturing into India.

Do you think global OEMs will leverage India as an export hub to emerging markets including Africa, Eastern Europe, and South-East Asia?

I think the exports will happen for all types of vehicles whether it is cars, CVs, lower horsepower motorcycles, etc. India certainly has scale that will enable cost-competitiveness for the global OEMs especially for small cars. In the entry-level segments, India can certainly be a major contender for exports to some of the overseas markets. As per the recent trends, a lot of entry-level cars are now being designed and manufactured in India before making inroads to other markets. So a lot of companies have earmarked India as a global manufacturing hub. Infact, a lot of premium OEMs are moving in that direction.

Early this year, Prime Minister Manmohan Singh has finally unveiled the National Electric Mobility Mission Plan (NEMMP) 2020. Do you think it will give a fillip to the Industry?

As of today, we don’t really have much of an electric vehicle market in India. It’s very small in volumes maybe a few hybrid and electric cars. But in no ways it is a significant part of the automotive landscape. The policy announced by the Prime Minister will certainly help in making these products more attractive to the consumers through various incentives, subsidies, etc. But I don’t think India is going to be a significant market for electric mobility. This is because it’s not just a question of incentivising vehicles, but it is also about the infrastructure in the likes of charging stations. We have a serious deficit of power and don’t want to take the risk of buying a zero-emission vehicle and getting stuck somewhere because of absence of charging points. So what may actually play out not only here but other markets is that it may become a product of certain select cities or segments as a second or third vehicle.

Even though the there has been a deceleration in demand for vehicles, some segments like SUV, MPV, etc, are witnessing unprecedented growth. Any particular reasons?

I think the growth of these segments is really being driven by supply and not by demand. By that I mean the introduction of the new products like the Mahindra XUV500 or the Renault Duster has created the market for these products. So rather than people waiting for these products, the affordability of these products and the current operating conditions have played a pivotal role for its success. So it was driven more by supply of these products which is bridging the gap between small cars and high-end sedans and SUVs. Of late, compacts SUVs and MPVs are gaining a lot of popularity. At the same time, the growth rate is positive also because of lower base in the preceding period.  But it should see some stabilisation as we go forward.

E&Y has claimed that that passenger vehicle sales and production in India expected to grow by 14 to 16pc over the next decade, reaching over 9 to 10 million units annually. Are you still standing by it?

I think those projections are still valid from a mid-term perspective i.e. the year 2020. As I said earlier, we will have some periods of cyclicality and some of that has been factored in. Infact, if you go 20 years back in the post-liberalisation era, the automotive industry has actually grown faster. While some periods have grown by 22pc some have seen a surge of 19pc in passenger vehicles. Likewise, 9-10 million units in production (including domestic sales+exports) by 2020 look very achievable. These are not only EY’s views but in general the views of the industry and other forecasting firms

But can the country’s automotive industry figure among the top 5 markets in the world in the next few years?

With these kinds of volumes, I would expect India to figure among the top 5 markets in the world in the next few years. This is because there is no other auto market (barring China) which is witnessing such an exponential growth.