Problems ‘far more deep-rooted’ in current slowdown: Mayank Pareek

For someone who has been in the passenger car industry for decades, Mayank Pareek is only too familiar with its cyclical nature.

Yet, the current pace of growth, or more specifically the lack of it, has him a little concerned. “This is not the first time industry is seeing a slowdown but this time around its very characteristic is different for the sheer longevity,” says the President, Passenger Vehicles Business Unit, Tata Motors.

It was earlier this week when the Society of Indian Automobile Manufacturers made public its sales data for July and it is evident that nothing has improved. On the contrary, things just seem to be hurtling downhill at a rapid pace.

And even while this marks the thirteenth consecutive month of “sharp decline” for passenger cars, Pareek says there is more to it than meets the eye. In other words, the news is much worse since the present data does not quite divulge the entire story.

Situation worsening

For one, it is based on how many units manufacturers despatch to dealers when, in reality, the actual picture of customer off-take for passenger cars, translated as the retail portion, began in January 2018 itself. This was when things “started coming down” but it was not apparent since the supply pipeline was being filled constantly.

As Pareek says, one “began noticing this only when the water came over your head” and things have pretty much stayed at this level since then. Yet, it is the disturbing duration of this slowdown which makes it different from previous lows. On previous occasions, they typically lasted three-four months before things came back on track.

“This time around, the problems are far more deep-rooted. The self-correction that used to happen in the past is not happening now,” says Pareek. Again, in previous cycles, there was one clear reason why a slowdown happened and this would be addressed by the Centre/industry. “However, multiple things are happening this time,” he adds. One of the biggest factors is the liquidity crunch, which is hampering buying. Interestingly, the “signs were apparent” much before the IL&FS crisis became public that there was just not enough money going around.

Earlier, when customers booked a car, 95 per cent of them would get a loan but this figure has now come down to 74 per cent. And when someone does not get a loan, explains Pareek, they do not apply again since they perceive the rejection as some kind of social stigma.

The fact that the loan space was being squeezed became apparent since January last year when while the passenger car industry continued to feed the dealer pipeline with stocks and the pile-up continued.

Late realisation

It was only in February 2019 did stakeholders realise that “something was amiss”. The belated awakening was perhaps not entirely their fault since “all of us work on hope by the end of the day”. Traditionally, April and May are bad months for industry and stocks pile up to meet the demand for June.

Last year, however, saw huge stocks accumulate in June. Clearly, there was a lot of stress within the system but the industry was hopeful of better days ahead. After all, Onam was around the corner in Kerala and hopes were raised for a boom period during this festival season till the floods happened.

“It was virtually a washout,” recalls Pareek. Despite this setback, manufacturers were reasonably optimistic that things would look up in November and kept on stocking. Their reasoning was that the flood was a one-off thing even while it was getting clear that the danger signs were becoming more visible.

Earlier, buyers would get a loan with a CIBIL (credit rating history) score of 650 but now even with 750, they would be put through a due diligence where the chances of rejection remained quite high. Naturally, market sentiment turned cautious since customers were not ready to go through this process.

“It has become this way for a while and availability of loans just dried up,” says Pareek. The puzzling part here is that in the car industry, the chances of NPAs building up are low unlike commercial vehicles, which is a B2B space dependent on fleet ownership costs.

As he explains, a car is bought for personal consumption like a home, which means that the customer plans out in great details for EMIs “and the die is cast”. In Pareek’s view, defaulting on a loan is unlikely with the middle-class buyer “who is extremely careful about his/her social standing” and would not like to be seen as conning the system.

Now with banks becoming overcautious about lending, things have just become a lot worse. The problem is also being accentuated by the fact that maintenance costs for cars are increasing in terms of fuel, insurance, etc. If the proposed notification on higher registration fees comes into effect, it will only lead to the car becoming a “white elephant” for the buyer.

Part of the economy

From Pareek’s point of view, such a situation would be catastrophic since a car is eventually a critical part of the overall economy. After all, production of automobiles creates jobs and also supports other industries such as glass, steel, metal, rubber, components, etc.

Even while the problem of accessing loans persists, the good news is that there is still tremendous desire within the market to own a car.

“I hope, wish and pray that the liquidity situation improves because things could get difficult otherwise,” says Pareek.

There will be some buoyancy in the festive season coming up soon thanks to sentiment associated with the occasion but, beyond that, the industry is in dire need of a lifeline. It now remains to be seen how quickly the Centre gets into the picture and does its bit in injecting some kind of stimulus for buying cars.

On the Tata Motors side, Pareek refers to a retail initiative being planned called ‘new paradigm’ where the idea is to sharpen the focus on real retail sales. “The easiest thing is to push vehicles to dealers but this is not right,” he says. On the contrary, the idea now is to increase retail capability with “more feet on the street”.

Consequently, there have been huge hires happening in the numbers of dealer employees where the bigger task on hand is to change prevalent attitudes that have been around for years. Pareek admits it will be a challenge but this is the best way forward. Plans are also on to reduce stock levels to three-four weeks from September.

The next priority is to increase the number of dealership locations in order to access the customer better. At present, there are nearly 900 car outlets but this is not enough compared to competitors who have over twice as many.

“The opportunities are out there there in small micro segments where we need to penetrate deep and wide,” says Pareek. It is important to constantly engage with customers and ensure that there are more test drives to keep their interest levels high. “We are actually working on enablers instead of the outcome,” he adds.

The next big launch is the Altroz and the company is hopeful that it will play its role in getting customer connect. Pareek also believes that volumes of other recently launched models like Harrier will pick up in due course. “Brands are built here at Tata Motors and not products. If you push harder than the market’s actual appetite, it will not work,” he says.