Diversification And Cost Reduction Critical For Firms
BMI View : With Indian automakers cutting jobs across the board, we remain cautious that further layoffs of permanent workers could worsen the already poor consumer sentiment. We are sceptical that SIAM's request for an industry revival package will materialise, and even if it does, whether the measures will be sufficient to address the underlying issue of weak demand. We believe OEMs and component manufacturers will need to focus on cost reduction and boost exports on the back of the weaker Indian rupee, as they look to ride out the storm facing the Indian autos sector.
The moribund auto sector has put firms into survival mode and we are beginning to see the layoffs, which we warned would follow should there be no respite in the depressed market sentiment ( see 'Passenger Vehicle Market Woes Threaten Supply Chain', June 19).
Temporary Workforce Gets The Cut For Now
The director general of the Society of Indian Automobile Manufacturers (SIAM), Vishnu Mathur, has said that original equipment manufacturers (OEMs) have begun adjusting their temporary and casual workforce in response to market conditions. Indeed, automakers have been downsizing their workforce over the past few months as they grapple with falling production at their plants due to the lack of domestic demand.
Maruti Suzuki India (MSI) has asked some of its temporary workers at its Manesar diesel engine plant to go on leave. This came after the firm sent 200 contractual workers at its Gurgaon plant on indefinite leave in July. Toyota Kirloskar Motor has also confirmed reports that it has not renewed contracts of temporary workers and earlier this month Tata Motors announced that it was cutting its Pantnagar unit workforce by 21%. Tata's plants in Sanand and Hubli have also seen a drop in employee headcount. Additionally, Mahindra & Mahindra laid off 500 workers at its Chakan plant in July.
Given the huge reliance on temporary workers in the manufacturing sector, OEMs have had the flexibility for now to reduce their temporary workforce to cope with falling demand. However, further declines in the market could spur firms to begin cutting their regular workforce and with over a million workers employed by the industry, this would worsen the already dour consumer sentiment.
|OEMs||Component Manufacturers||Dealerships And Service Centres|
|Source: BMI, SIAM|
That said, given the bureaucratic hurdles of firing workers in India, wider industry layoffs would be a long drawn-out process and many firms may just choose to keep workers on their payroll and take a hit to their already poor earnings.
Local Manufacturers Need To Diversify
The falling production at local OEM manufacturing plants has also led to a trickle-down effect on component manufacturers and as demand for their parts falls, they too will see the need to reduce their costs by firing workers. Given our view that demand will not pick up strongly in FY2013/14 (April-March), we believe local producers (both parts makers and OEMs) should look to increase their exports on the back of the weak Indian rupee ( see 'Exports Will Be Crucial For Maruti To Combat Weak Rupee', July 31).
Industry Revival Package Unlikely To Boost Fortunes
SIAM has approached the government for a stimulus package to revive the flagging auto sector. Besides large scale fleet purchases to modernise government vehicles, SIAM has also asked for a reduction in excise duty and an end to the government vehicle purchase ban put in place in May 2012.
However, we deem it unlikely that the cash strapped government will be able to finance a large-scale stimulus programme for the sector. The government is already struggling to meet its budget deficit target for the current fiscal year. Furthermore, any piecemeal measures to aid the industry will not lead to a sustained revival in demand. Hence, given BMI's view that the auto sector will remain in the doldrums for the foreseeable future ( see 'Turning Bearish On Autos', August 14), we believe firms should look to reduce their costs and boost exports, as they try to ride out the storm.