Capacity utilization deficit puts Motown in reverse gear

Siddharth Tak/ ZRG/ Delhi

India faces a problem of aplenty which is unlikely to get mitigated anytime soon given the current depressed economic situation. This brings with it the grave risk of ruining country’s tryst with the manufacturing story.

The country witnessed a 123 percent growth in car capacity during last six years in view of India’s perceived potential to be the global car manufacturing hub. Worse, fresh capacity addition announcements from global car majors continue unabated posing a serious question mark over the viability of the passenger car industry in India.

India passenger car capacity, according to industry estimates, mounted from 1.88 million in 2006-07 to 4.2 million in 2011-12 while the capacity utilization observed an alarming deficit as it plunged from 82 percent to 70 percent during the period under review.

This, however, has not deterred global auto makers in the country from announcing fresh investment plans for India. Kirloskar Group (joint venture partner producing Toyota cars here) vice-chairman, Vikram Kirloskar announced earlier this month the decision to expand Toyota India’s production capacity in Bangalore with an investment of Rs. 900 crore by March 2013.

This capacity expansion plan comes in wake of phenomenal increase in capacity observed in recent past in majority of auto players in India. A review of passenger car numbers conducted here by Fortune Equity Brokers concluded that during the last six years Skoda Auto India increased its car production capacity by a maximum of 367 percent, followed by Toyota Kirloskar (215 percent), Honda Siel (167 percent), General Motors (165 percent), Tata Motors (115 percent), and Hyundai Motors (110 percent). Maruti Suzuki, Ford India and Fiat India too doubled their respective capacities in India.

At the end of 2010-11, India had a capacity to manufacture four million passenger vehicles which was eventually scaled-up to 4.2 million units by 2011-12. While incumbents such as Maruti Suzuki, Tata Motors (at Sanand) and M&M (at Pune) have added significant capacities, over 50 percent of the capacity expansion has come in from new entrants such as Volkswagen (Pune), Renault-Nissan (Tamil Nadu). Peugeot Citroen and Ford have also evinced interest in setting up Greenfield manufacturing facilities in Gujarat, which is aiming to gradually emerge as India’s new automotive hub.

But what is worrying that the growth in capacity over the years has not led to the desired results. While there may not be always a direct connect between capacity establishment and its instant utilization, the drop in utilization levels is already a cause of worry.

While car companies themselves are tightlipped about the burden that stares them in their face, auto veteran and former Maruti Suzuki managing director and promoter of car service multi-brand retail Carnation, Jagdish Khattar summed up the sentiment: “Decrease in the sales of new cars is the main reason which has led to underutilization of capacity in India.”

The auto industry association, Society of Indian Automobile Manufacturers (SIAM) Director General Sugato Sen too admitted to the issue at hand. “Cars capacity underutilization is not in a happy situation. Consumers are not buying cars as results automakers are producing lesser cars.”

The domestic car sales growth rate increased by just 2.19 percent in the year 2011-12, second slowest in last six years while the cars sales growth increased by 22 percent in 2006-07. Also, domestic cars sales in August 2012 declined by 18.56 percent month on month last year.

Mahantesh Sabarad, Senior Vice President, Fortune Equity Brokers, averred, “Industry wide capacity is at a high level but the utilization rate is comparatively low.” Subrata Ray, Senior vice President, ICRA said passenger vehicle volumes were expected to grow moderately between 5 to 7 percent in 2012-13.

But what would explain the fall in demand? Abdul Majeed, Automotive Leader at PwC India, opined, “So far passenger cars had witnessed a healthy growth trend wherein companies were able to meet the domestic as well as export demand. But rising fuel prices, high interest rates, and hike in excise duty post budget were the major determinants which has led to slowdown in the production of cars in the country.”

Sabarad at Fortune said that at end of March 2012, Maruti led with production capacity share at 28.9 percent, followed by Hyundai Motors at 15.2 percent, Tata Motors at 14.8 percent, General Motors at 5.4 percent, and Mahindra & Mahindra at 5.1 percent.

Ford India and Renault-Nissan share stood at 4.8 percent each while Toyota Kirloskar share stood at 4.6 percent. Honda Siel has a 3.9 percent share today with Volkswagen closely following with 3.6 percent share. Skoda Auto share stood at 3.4 per cent with Daimler Chrysler at lowest capacity share of 0.2 per cent, said the brokerage report. Efforts to get companies to confirm or deny the numbers did not elicit any response.