Logistics faces Collateral Damage in Motown India
There is no denying the fact that the automotive sector in India is going through a phase of drag and is facing the worst hit in the last two decades. This slump in India’s automobile sector is taking a serious toll on allied industries that are co-dependent on the economies of the automotive sector. And LOGISTICS is no exception. The automotive logistics that roughly accounts for 5% of the total automobile sector is crippling due to the cascading effect of the auto slowdown.
Mahendra Jatav, a 32 years old truck driver, after witnessing several incidents of shutdown in the past two months has decided to move back to his native village in Raebareli. Big automotive companies such as Maruti Suzuki India Limited, Tata Motors Limited and Mahindra & Mahindra Limited have decided to cut production in the wake of an overhang of the inventory.
The production cutdown by automotive giants has left the trailer truck driver jobless as the demand has declined sharply in a very short period of time. Jatav said: “Sooner or later, they would have asked me to leave as the company is defaulting on loans. Repairs are delayed. The previous month, there was no consignment for 18 days. We used to deliver for Maruti but half of the company fleet is parked for the past days.”
Automotive logistics industry accounts for 4-5% of the total turnover of the automotive industry. If the size of the auto industry is estimated to be at INR 4.8 lakh crore, around INR 25,000 crore would be the annual size of the automotive logistics industry.
Indian logistics industry that is poised to cross the market cap of $200 billion by 2026 is in whirlwinds amidst the economic slowdown and the future of the INR 25,000 crore worth industry is at stake.
Boosters for the ailing auto industry
Finance Minister Nirmala Sitharaman recently announced a few measures to revive the demand in the automobile industry:
- The government lifted a ban on the purchase of vehicles by the government departments.
- Vehicle depreciation value increased to 30% by allowing an additional 15% on all the vehicles bought till March 2020 from now onwards.
- One time registration fee on vehicles till June 2020 deferred with the announcement of BS-IV vehicles to remain operational for the full period of registration if bought before March 31, 2020.
- A new scrappage policy for vehicles to be rolled out soon.
- To tackle liquidity crunch, the government has announced to infuse an upfront amount of INR 70,000 crores into public sector banks, along with merger of public banks.
Indian logistics industry is tightly knitted with the automotive industry that has only seen downturns in the past year. While the overall freight demand has fallen, the logistics service providers are scouting for alternate measures, especially for those who are operating fleets loaned from banks.
LSPs say shock measures given to the economy have now started to show its effect. Emission norms, axle load norms, average norms, GST and lesser purchase capacity of the consumer have led to an overhang of inventory, closing dealerships, forcing manufacturers to shrink operations in turn hurting logistics.
Vipul Nanda, President, Car Carrier Association and Founder of Mercurio Pallia Logistics told Logistics Insider, “It is difficult to estimate the exact losses of the LSP industry, but it is a bloodbath.”
On being asked how LSPs should strategies their operations in this situation, Mr Nanda said, “In this unprecedented slowdown, it is very difficult to make a strategy. Volumes are low, clients are reducing the prices. Hence, the margins are also getting affected. The only area where I can see the possibility of making a strategy is in the expenditure section of a business. LSPs should reduce their expenses, keep debts as low as possible and maximise productivity with minimum resources.”
Total auto production witnessed a decline of about 10.5% y-o-y in Q1 FY20 vis-à-vis a growth of about 16.6% during Q1 FY19. There are large inventories of roughly about 30-45 days along with dealers and wholesalers forcing many major manufacturers (OEMs) to cut production.
It is estimated that in the last one year, the auto industry has already suffered job losses between 8-10 lakh across key automobile manufacturing locations. Whenever there is a production cut of 20% by OEMs, there is a cascading effect that leads to job losses across the value chain of the auto component manufacturers.
Modi government, famous for its ambitious long term plans, in the Automotive Mission Plan 2026, has set a target to triple industry revenues, to $300 billion, and expand exports sevenfold, to $80 billion.
To tackle emissions, the government seeks to bring local standards up to be at par with global standards, enabling India to leapfrog from BS-IV to BS-VI emissions (the Euro 6 equivalent) by 2020. Additionally, India has implemented Corporate Average Fuel Efficiency norms in which the manufacturers have to improve their fuel efficiency by 10% between 2017 and 2021 and by 30% or more from 2022.