Indian car market suffers as economy sours

October was supposed to herald a revolution for Indian automakers. Tata Motors had planned to roll out the Nano, a 100,000 rupee ($2,000) snub-nosed auto that would bring car ownership to the masses.

But a major land dispute has delayed the Nano's launch. And more worrisome: After years of double-digit growth, Indian auto companies face falling sales.

India's growing consumer base has not inoculated them from the global financial crisis. Battered by high interest rates and tight credit, auto sales began to shrink in the summer, falling 1.9 percent in July and August. After a mild comeback in September, reports from major automakers suggest they fell again in October.

For Ganesh Dalvi, an eager young Mahindra-Renault salesman in a pink button-down shirt, that means it has been three months since he has sold enough cars to get a performance bonus.

Dalvi, who himself can only afford a motorbike, has resorted to cold calling.

"I want to own a car," he said. Fluorescent lighting bounced off the largely empty sales floor at the dealership on the northern outskirts of Mumbai. "That's why I'm doing this cold calling. I want money because I want a car."

Few Indians own cars: There are just 7 per thousand people, according to the Society of Indian Automobile Manufacturers, an industry group. That compares to 18 in Indonesia, 57 in Thailand, 453 in the U.S. and 565 in Germany.

Global automakers see potential. Sales reached 1.5 million cars last year, and the middle class is projected to grow from 50 million people today to 583 million by 2025, according to McKinsey & Co.

Toyota Motor Corp., Honda Motor Co., Renault SA, Daimler AG, and Volkswagen AG are all building new factories, and General Motors Corp. and Ford Motor Co. are ramping up production.

But the short-term may present more challenges than opportunites.

The International Monetary Fund downgraded its forecast for India's 2009 economic growth to 6.3 percent on Thursday, a sharp drop from last year's 9.3 percent. The benchmark Sensex stock market index has lost more than half its value since the beginning of the year.

Analysts expect passenger car sales, which averaged 17.2 percent annual growth over the last five years, to grow just 6 to 8 percent this year.

The most recent quarter was a bleak one for India's leading automakers, who reported double-digit declines in profits for the July-September period.

Tata said its profit fell 34.1 percent to 3.47 billion rupees ($70.1 million). Nearly two-thirds of Tata's earnings come from sales of commercial vehicles, which have been hit by slower growth in industrial production.

Farmer protests also forced the company to halt construction of a $350 million Nano factory and find another site. The company still aims for a modest launch by year-end using existing factories, but says it will take 6 to 12 months to ramp up production to 250,000 vehicles at the new location.

Maruti Suzuki, which sells almost half of all passenger vehicles in India, said net profit plunged 36.5 percent to 2.96 billion rupees ($60 million), because of rising materials costs and a falling rupee.

Mahindra & Mahindra Ltd., India's largest SUV and tractor maker, said net profit fell 20.6 percent to 1.86 billion rupees ($37.6 million) for similar reasons.

Tata sold 39,729 vehicles last month, 20 percent less than last year, and Maruti Suzuki reported total sales of 64,490 vehicles, down 7 percent from last year.

In recent weeks, the Reserve Bank of India has cut its key interest rate and taken a host of other measures to ensure that banks have adequate cash to meet debt obligations and make loans.

But commercial banks, stung by the global credit squeeze and growing portfolios of bad loans, have been reluctant to pass on lower rates to consumers.

Eighteen months ago, car loans cost 7 to 9 percent a year; now they are running 17 to 18 percent, according to the Indian automakers group.

In recent days, state run banks, responding to government pressure, have pledged to lower lending rates.

On Thursday, the nation's largest bank, the State Bank of India, said it would cut its prime lending rate by 0.75 percentage points, and Citibank said it would slash its key rate by half a point.

But some economists say rates are not likely to fall fast enough to give a big boost to consumption.

"Bank lending rates are unlikely to fall substantially and immediately, as liquidity conditions remain tight and credit risk remains elevated," Goldman Sachs economist Tushar Poddar wrote in a note to clients this week.

Raw materials prices are falling now, and Ashutosh Goel, an auto analyst at Mumbai's Edelweiss Capital, believes that and lower interest rates will eventually help India's automakers.

"I don't think the long-term trend has changed," he said. "The auto industry is by nature cyclical. While we expect the long-term trend to be 15 percent, passenger car growth can fluctuate. Year to year it might go from zero to 25 percent."

Source: ndtvprofit