Automobile companies, faced with slowing sales and a high cost of finance, are shying away from making new investments. Many have put expansion plans on hold.
Bajaj Auto Ltd, the country’s second-largest motorcycle maker, has deferred a final decision on its fourth manufacturing facility in Mundra, Gujarat. Bajaj’s biggest rival, India’s No 1 two-wheeler maker, Hero MotoCorp, has also put off work on starting another manufacturing facility in one of the southern states. Hero had set aside an investment of Rs 500 crore to set up the new plant. Hyundai Motor India Ltd, India’s No. 2 car maker after Maruti, has put off plans to set up a diesel engine factory in Chennai.
Automobile makers are regularly wooed by state governments to set up factories, since they create jobs and give more work to vendors. For instance, two-wheeler companies source almost their entire components from within India, boosting small businesses. A deferment of investment by these companies hits growth all around.
“We are operating at more than 90 per cent of our capacity. We should set up a new plant; Gujarat is a likely alternative. But the economic conditions are so uncertain, we want to be prudent and see how the market develops,” said Rajiv Bajaj, managing director, Bajaj. “If there is a meltdown, we don’t want to be caught on the wrong foot.”
Bajaj’s motorcycle sales grew by a modest 1.9 per cent to 244,503 units in the domestic market in October, tumbling from a 14 per cent sales growth in June. After posting strong double-digit growth rates in the first half of the financial year, two-wheeler sales (which include motorcycles) for the entire industry slowed to a two per cent growth to 1,147,621 units last month. Though the two-wheeler segment is projected to end the financial year with sales growth of 13-15 per cent, manufacturers are exercising caution in investing in fresh capacity, which they fear, may remain unutilised.
“With interest rates going up, customers are showing a tendency to postpone purchases for which they have to avail of financing options. For companies, the cost of manufacturing has gone up,” said Ravi Sud, chief financial officer, Hero MotoCorp. “As interest rates continue to rise, firms are getting defensive and holding back investments. Even banks are depicting reluctance to loan to small and medium enterprises.”
Hero MotoCorp had set aside Rs 500 crore in this financial year for its new plant in the south. Sud said the investment would now be carried forward in the next financial year.
Bajaj had considered an investment of Rs 1,000 crore to set up its fourth and largest plant scheduled to have an annual capacity to roll out five million vehicles, almost doubling the company’s capacity. Bajaj makes 375,000 motorcycles and 50,000 commercial vehicles every month in its three manufacturing facilities in Aurangabad and Chakan in Maharashtra and Pantnagar in Uttarakhand. Hero has a combined capacity to make 6.15 million vehicles in its three plants in Dharuhera and Gurgaon (Haryana) and Hardwar (Uttarakhand),
The impact of the slowdown is not limited to the two-wheeler segment alone. The country’s second-largest car maker Hyundai has stalled an investment of roughly Rs 400 crore for a diesel engine manufacturing facility in Chennai. “We are not taking any decision on the diesel plant yet. But our investments here are so high, we can only go forward and not back,” said Arvind Saxena, director (marketing and sales).
The company has not decided on a timeline to revive the project given the sluggish demand in the domestic market. Passenger car sales have been on a slide since July. Car sales witnessed their sharpest drop in over a decade, slumping by 24 per cent to 138,521 units in October. Hyundai currently imports diesel engines for its premium hatchback i20 and mid-size sedan Verna. The proposed diesel engine factory was designed to have a capacity of 150,000 units per annum.