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Automotive Product Finder Magazine | R&D intensity has increased over the last few years
R&D intensity has increased over the last few years
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The central government, state government and the indian automotive industry together have undertaken the NATRiP initiative to establish state-of-the-art research and testing facility. The initiative includes facilities at Manesar, Chennai, Indore, Pune, Ahmednagar, Silchar and Raebareli. Hetal Gandhi, Director, CRISIL Research informs these facilities are being nurtured for safety and development testing for the OEM and auto component industry.
What is the current situation of the Passenger Vehicles segment?
Domestic passenger vehicle wholesale sales registered a 3 per cent decline in March 2019 taking the fiscal 2019 growth to around 3 per cent. Retail sentiments continue to remain tepid led by high cost of ownership, lack of major model launches and uncertainty around the forthcoming elections. As per our market interactions, passenger vehicle dealer inventory stands at ~40 days against normal inventory of ~30 days. Owing to the elevated inventory levels, many OEMs have undertaken production cuts. In fact, cumulative production volumes between October 2018 and March 2019 have been lower than total offtake (domestic sales+exports) for passenger vehicles.
How is the government planning to build India into an R&D hub?
National Automotive Testing and R&D Infrastructure Project (NATRiP) is an initiative undertaken by the central government, state government and Indian automotive industry to establish state-of-the-art research and testing facility. The initiative includes facilities at Manesar, Chennai, Indore, Pune, Ahmednagar, Silchar and Raebareli. The Manesar and Pithampur facilities were inaugurated recently. It aims to develop capabilities for safety and development testing for OEM and component industry. Given the host of regulations that the industry needs to comply with, the R&D intensity has definitely increased over the last few years. Having said that, the OEM R&D expenditure in India still remains low as compared to the developed world, and hence there is still time for India to establish itself as an R&D hub.
What was the domestic sales of Passenger Vehicles in FY2018-19 and how did it fare against the previous fiscal?
On a yearly basis, FY19 growth rate was around 3 per cent compared to 8 per cent growth rate in FY18. PV segment sales in FY19 slowed down significantly, particularly in H2FY19 (growing by -1 per cent) despite a lower base in H2FY18 (as festive season was in H1 in FY18 and shifted to H2 in FY19). The slowdown began with the rise in fuel prices and change in insurance norms, leading to higher upfront insurance costs, coupled with liquidity tightening (finance penetration in the PV industry is ~78 per cent), leading to higher total ownership cost in FY19. Cost of ownership is expected to have increased by 6-8 per cent in FY19.
Which are the areas where we can see a penetration of electrification?
In the PV segment, electrification is expected to be first seen in cab aggregator and taxi segment as such vehicles with their higher running will be able to spread the higher battery cost over the greater distance travelled by them. Also, FAME 2 announced in March 2019, which provides subsidies only on passenger vehicles used commercially (cab aggregator and taxi segment), is expected to further aid the electrification in taxi segment.
How will OEMs overcome the challenge of shared mobility with the increasing number of cars and lesser space on roads?
Top 20 cities that contribute ~50 per cent of the sales have shown slower growth in the last 3-4 years due to traffic congestion faced during peak hours, lack of sufficient parking spaces and availability of hassle free shared mobility solution. Hence, we believe that shared mobility has already started impacting sales in metro cities. As per our analysis, a taxi clocks an average 150 kms/day against 30 kms/day covered by a private PV owner. While on one hand, cab-aggregators are utilising the asset better and shared rides are increasing the load factor (number of people in a vehicle) of vehicle and thereby impacting sales negatively. On the other hand, cab-aggregators are also attracting people from non-car modes of transport such as auto-rickshaws and AC buses, which is aiding demand. In a nutshell, our analysis indicates that shared mobility could shave off around 100bps of growth from our long term growth forecast.
In order to participate in sustainable mobility solutions, including multi-modal urban mobility, OEMs have started investing in cab aggregators and other mobility solution providers. Recently in February 2019, Hyundai & Kia have invested $350 million in Ola. Hyundai has also invested $14 million in Revv. In April 2019, M&M & Ford invested $40 million in Zoomcar. M&M launched its own e-mobility service Glyd in Mumbai in March 2019.
What are the other challenges OEMs are facing?
a. Steel and iron, that account for 70-75 per cent of average kerb weight of a passenger car has seen a price rise of 15 per cent and 10 per cent respectively in fiscal 2019. While prices are expected to remain elevated in H1 fiscal 2020, we expect the prices to soften in H2 fiscal 2019, led by lowering global prices. Amid slower demand and intense competition, it remains to be seen if OEMs will be able to completely pass on the cost increase to their customers.
b. Players are expected to find it difficult to fully pass on the cost escalations due to upcoming mandatory safety norms and emission norms (BS VI) in the current scenario, wherein retail sentiments are dampened.
c. Players are also undertaking huge capex for developing electric vehicles in India. FAME II scheme announced by government provides subsidy only to the taxi segment. Thus, it is favourable for the manufacturers to develop and market an EV focusing on the taxi segment, However, development of charging infrastructure and uncertainty in policy from longer-term perspective remains a key challenge for the industry.
d. The air quality index of many major Indian cities has taken a hit from the pollutants emanating from PVs. In Delhi, one of the most polluted cities globally as per various studies, the government has taken steps such as the odd-even scheme, promoting public transportation, ban of diesel vehicles older than 10 years, etc., in order to deal with the situation. Such schemes can potentially discourage a consumer from purchasing a vehicle, thus posing a threat to the industry.
e. Being a manufacturing industry that requires huge manpower, OEMs have to deal with labour unrest and strike with demands of wage increment.
What are the kind of opportunities in the PV segment?
Vehicle penetration in India is very low compared to other countries. As of fiscal 2019, India had ~21 passenger vehicles per 1,000 people. This is significantly lower than both developed nations and even other nations in the BRIC group (Brazil, Russia, and China). Thus the country holds tremendous potential to improve PV sales by augmenting penetration in tier 2 and 3 cities. Projected healthy rise in addressable households is expected to increase the passenger vehicle penetration to 25-27 cars per 1,000 people by fiscal 2023.
We expect GDP to grow by 7.3 per cent in fiscal 2020. As per IMF, GDP per capita is estimated to grow by ~51 per cent in 2024. This is expected to induce first-time buyers, as passenger vehicle is an aspirational purchase in India. Thus, favourable macroeconomic conditions and increase in purchasing power are expected to boost sales of PV segment.
UV sales are increasing as consumer preferences are shifting from large cars to this segment. This has also been observed by the launch of multiple models in the UV segment like Marazzo, TUV300, WR-V, Jeep Compass, Tata Harrier to name a few. Also, new entrants, such as Kia Motors and M G Motors are also expected to launch UVs, supporting the segment growth.
National Automotive Testing
Cab Aggregator And Taxi Segment
M G Motors
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