Demand and Supply In The Automotive Sector

Last year, the automobile sector was one of the worst hit sectors due to the COVID-19 pandemic. The automobile sector has rebounded since June 2020 because of pent-up demand, and robust rural economy but the recovery of the automobile sector is weak compared to the overall market. 

The automobile segment recorded 18.2% decline on a Y-O-Y basis for the 42-day festive season. It also recorded a decline of 5% in October 2021 compared to a year ago. The decline during the festive season was led by semi-conductor shortage in the passenger vehicle segment and low demand prevailing in the two-wheeler space. 

The two-wheeler segment, which contributes approximately 75% of the total sales volume during the 42 days festive season, recorded degrowth of 18.49% during the period this year. The reason behind the mediocre performance of the two-wheeler segment is the brunt of low sales prevailing in the entry-level category of two-wheeler vehicles. 

The two-wheeler segment recorded a sale of 15.79 Lakh vehicles during the festive season of 2021 compared to 19.38 lakh vehicles sold during 2020. This is attributed to the rural distress in the retail segment coupled with price hikes, triple-digit fuel prices and customers saving more for healthcare emergencies. The rural economy of India was severely hit during the second wave of COVID-19 compared to the first wave, and it dampened the rural demand for the festive season of 2021. 

The sale of passenger vehicles also recorded a fall of 26.2% during the festive season of 2021. However, the fall in passenger vehicles is not completely driven by demand-side problems such as the two-wheeler segment. The demand trend in certain PV segments such as SUV, Compact-SUV and Luxury category is above healthy demand, but the shortage of semi-conductors led to a huge reduction in the supply of vehicles. 

The inventory level of PVs has come down to 10-15 days whereas it used to be in the range of 20-25 days mentioned by the FADA (Federation of Automobile Dealers Association) President Mr. Vinkesh Gulati. It indicates that the current inventories held by the dealers last only 10-15 days whereas it used to last 20-25 days during the last year. The order book is solid for PVs, but some vehicles’ waiting period has gone up from 1-2 months to 2-4 months. So, the problem in PVs is associated with supply-side issues, whereas the problem of the 2W segment is associated with demand-side constraints. The demand side problem of 2W vehicles caused the inventory level of 2W segment to go up to 40-45 days, as mentioned by the FADA during the October’21 release. 

The CV (Commercial Vehicle) segment recorded growth of 26% on YOY basis during October ’21 on account of SCVs (Small Commercial Vehicle) growing strong due to intra city goods movement and M&HCVs (Medium and Heavy Commercial Vehicle) picking up driven by the resumption of infrastructure projects in different states.  

The near-term outlook for Passenger Vehicles remains gloomy. Though the market players believe that the worst of semi-conductor issues is behind, it might still take some time before we see normalization in the supply chain of passenger vehicles. As per the statement released by FADA “Even though the festive period is now over, there is still a huge backlog of order in the PV segment. If PV OEMs can realign supply with demand, we can still see a good year end retail.” The two-wheeler segment, which is grappling with demand issue, FADA has asked the 2W players to rollout out some attractive schemes so that it can help to revive the demand scenario in the two-wheeler segment. The recovery of the rural economy should also auger well for the two-wheeler segment of India, but the entry of EVs (Electronic vehicles) might change the dynamics of existing players in the industry.