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.