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Stimulating the auto industry - Views on News from Equitymaster
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  • Nov 11, 2008

    Stimulating the auto industry

    Making a case for auto
    The economic slowdown has taken its toll on the US auto industry. Biggies such as General Motors, Chrysler and Ford have reported a more than 30% fall in volumes in the month of October. The industry is highly dependent on the financing environment. And with the situation remaining grim in terms of higher interest rate, lack of financing and weak consumer confidence, the auto industry worldwide has taken the flak.

    Further given that auto is an integral part of the manufacturing industry and is the first to get impacted by a slowdown, the newly elected Democrats are making a case for pulling the industry from the slump. This is part of the camp’s strategy to give first priority to repairing the battered US economy.

    As reported on Bloomberg, President-elect Barack Obama’s camp does not agree with the current Treasury Secretary Henry Paulson that the US$ 700 bn bailout package announced should not include non-financial companies. Whether Obama’s team will be successful in implementing these policies remains to be seen and a clearer picture will emerge only when the newly elected President assumes office in January 2009. But it is obvious that a rollback of many of the Bush policies is on the cards.

    As far as the Indian auto industry is concerned, times remain tough for the manufacturers. As per SIAM (Society of Indian Automobile Manufacturers), the auto industry that accounts for 30% of India’s manufacturing output, has recorded a 14.4% YoY decline in sales (from automakers to dealers) during October 2008. Commercial vehicles (CV) segment has suffered the most with its sales declining by 36% YoY. While 2-wheeler sales declined by 14.5% YoY passenger car market recorded a 9% slump during the month. This is the weakest sales performance by the Indian auto industry in eight years and has incidentally come in the month that generally records the highest sales (due to the festive season) in any given year.

    Automakers fear that the next two months (November and December) will be equally bad considering that many buyers defer purchase decisions to the new year, as has been the case in the past. So, are Indian policymakers expected to take cues from their US counterparts in voicing their concerns on the state of the country’s auto industry? We doubt, given that they (the Indian policymakers/politicians) are already quibbling over their political future, which shall be decided in the upcoming general elections.

    Export target hard to achieve
    Already burdened with a burgeoning trade deficit, things are not looking good on India’s exports front. As per Assocham’s data published in a leading business daily, Indian exports are likely to fall short of the targeted US$ 200 bn in FY09 by about 20%.

    The industries which are likely to be impacted the most are textiles, apparel, gems and jewellery, diamonds, brassware, handicraft and leather. This is worrisome given the fact that they account for a larger chunk of India’s exports to the US, European Union (EU) and the ASEAN (Association of South East Asian Nations) region. Not surprisingly the reasons attributed for the same include deepening recession in the developed countries of the US and Europe and rising ocean freight rates.

    Lack of infrastructure and increase in input costs are some of the other factors that are expected to bog down growth in exports. Given the poor state of India’s infrastructure, rising logistics and transportation costs are expected to chip away the competitiveness of the exports industry. The silver lining in the cloud is the fact that exports of pharmaceuticals, engineering, metal products and FMCG are likely to witness good growth as the demand for these goods is robust in the economies of the Middle East, South East Asia and Africa.

    China spurs commodities
    China’s gargantuan stimulus package of US$ 586 bn had a soaring effect on commodities. While crude oil surged by more than 5%, copper, zinc and lead also moved northwards under its spell. The money to be spent by China through 2010 on housing and infrastructure coupled with the fact that Saudi Aramco, the world’s biggest state oil company intends to cut production in December sent oil prices higher.

    It must be noted that oil prices had fallen 10% last week as stock markets tumbled and the increase in US fuel stockpiles was more than expected. Meanwhile, with the global financial turmoil uppermost in everybody’s minds, the group of 20 industrial nations (G-20) urged the governments and central bankers across the world to lower interest rates and take spending a notch higher to prevent economic growth from flagging. Ironically, cheap money is propagated as the mantra to cure problems created by cheap money in the first place.

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