Corporate Finance, Entrepreneurship, Indian Economy

Automobiles – not so mobile!

Automobiles- not so mobile!

Automobiles- not so mobile!

A slump in business, an economic slowdown, is a topic which most national and international newspapers talk about. All major businesses which depend on consumer spending are complaining about a serious drop in sales, which has forced corporates to shut down factories and lay off lakhs of people.

The automobile industry is one of the biggest employer of the country, employing over 4 million people directly and indirectly. It is said to impact approximately 10% of India’s GDP.

The current slump in the sales of automobile industries reminds us of the decades gone by, not because they faced the same issues as today, but because sales were slow as the whole auto sector was much smaller than what it is today.

May, 2019 saw the sharpest drop in sales (20.55%) recorded in 18 years. This steep drop in sales has forced large manufacturers like Suzuki, Mahindra, Hero Moto Corp, etc – now keep their factories shut for a few days each month, as there isn’t enough demand for their cars/ bikes.

There are many reasons for this mighty slump. Starting from the liquidity crisis, the rise of Uber and Ola and a weak rural economy.

Demonetization and the implementation of the Goods and Service tax has ensured that many people using showed banks/ finance, no longer have the option of these shadow banking options. Most people who buy a two or a four wheeler, take a loan to buy the vehicle. With no unofficial channel of finance available, rural India, which accounts for a major chunk of auto sales, is now unable to purchase tractors, cars or two-wheelers.

A fat chunk of the loans availed by consumers were from NBFCs. They have funded around 55-60% of commercial vehicles, 30% of passenger cars and nearly 65% of two-wheelers in India, according to ICRA. With NBFC loans being unavailable, more than 200 dealerships have shut down in the last 18 months across India.

After the downfall of IL&FS (Infrastructure Leasing & Financial Services), many banks that are sitting on piles of cash, are unwilling to lend money. NBFCs lend money to consumers for buying property, consumer durables or any other product that can be financed. They would usually raise funds from banks, and with banks unwilling to lend them money, lending out to consumers is out of the question.

As observed in many industries, it’s not that a consumer buys what he needs, he/ she is tempted into buying something they may not need, but can afford due to the loan they can take. It will be very rare to see someone buy a car or a large durable product without a loan. Therefore, without the availability of loans, automobile sales have dropped by a huge margin.

There was a time when 70-75% of car sales were financed by NBFCs. It has now fallen to around 50%, thanks to stricter lending norms put in place by lenders.

The slump for this market is drastic and there has to be some changes brought in by policy makers. The only silver lining for the industry is the upcoming festive season. Festivals like Navratri and Diwali could bring in temporary relief for automakers with sales set to go up, at least marginally.

An interesting point for many MNCs to note is the conglomerate of Bajaj. Bajaj sells two wheelers and it realized that it depended heavily on banks and NBFCs for auto sales. Most dealerships have a bank/ NBFC executive at their office in order to provide support to consumers walking in enquire about their bikes.

The Bajaj group has its own NBFC arm by the name of Bajaj Finserv, which offers cheap financing options to consumers for its consumers. This was done by Bajaj in anticipation to any market slowdown that could happen in the future. Despite a slowdown, Bajaj Auto witnessed a 7% increase in sales in May, 2019. Hence, it proves that there is a healthy demand in the market, and with financing options, people can purchase what they need.

The auto sector is witnessing a slowdown, despite consumers having the willingness to spend. Ensuring that sales do not dip and the company has enough finance with it to run operations is the task of the CEO. The CFO is tasked with mainly managing the finances, arrange finance (corporate finance) – but in the case of an NBFC, his role is as important as the CEO.

These are the times when people look up to a company’s CFO. If a CFO is able to manage corporate finance well, he can turn a loss making company into a wildly profitable company. At one point of time, the CFO was just meant to be a financial gatekeeper, although now he/ she is a strategic partner for the CEO.

Basically, a modern day CFO must think big, plan for the longer run, he/ she must serve as the final financial authority that .

He is seen as a leader who ensures financial stability for the organization, supports the CEO and provides the Board of directors with a long term plan to ensure the smooth functioning of the organization.

Conclusion

Financially difficult situations are pretty much inevitable in the modern world. Changes are constant, and it all boils down to the decisions made by the senior management, such as the CEO and the CFO.

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