Why India's automobile, pharma sectors are not ready to wean off China

India relies on China for products such as electronic components and drug ingredients because it cannot make them or source them elsewhere as cheap.

Days after a border clash with China this month in which 20 Indian soldiers were killed, New Delhi told firms to find ways to cut imports from China. But two big industries, automobiles and pharmaceuticals, say this is easier said than done.
Like many countries, India relies on China for products such as electronic components and drug ingredients because it cannot make them or source them elsewhere as cheaply, company and industry figures say.

Thus any moves to curb imports or make them costlier without developing alternatives will hurt local businesses.

"We don't import because we like to, but because we have no choice," said R.C. Bhargava, chairman of Maruti Suzuki India Ltd , the country's biggest carmaker.

"To attract companies to produce locally, we need to be more competitive and lower our costs compared with other countries."

India imported around $70.3 billion of goods from China in the fiscal year to March 2019, and exported just $16.7 billion - its widest trade deficit with any country.

The government is now consulting with companies on tightening curbs on 1,173 non-essential products, a trade body official said on condition of anonymity. They include toys, plastics, steel items, electronics and specific auto components - which feed vehicle manufacturing.

This is on top of plans to raise trade barriers and import duties on around 300 products from China and elsewhere, as part of Prime Minister Narendra Modi's self-reliance campaign.

Budget 2020: 'Overregulation' killing auto industry, says Rajiv Bajaj

Bajaj's remarks come against the backdrop of one of the most prolonged slowdowns plaguing India's automobile market, amid a slowing economy and dipping consumer confidence.

Union Budget 2020 Expectation : The automobile industry is facing a protracted slowdown because of “overregulation”, and the upcoming Budget is unlikely to address its woes, Rajiv Bajaj, managing director of Bajaj Auto, said on Tuesday.

“In my view, the single most important reason responsible for the current state of affairs the industry finds itself in is overregulation. It’s overregulation that is killing the industry,” he said on the sidelines of an event in Mumbai, where the company revealed the prices of the e-Chetak.

Bookings for the company’s maiden offer in the electric segment, with prices starting from Rs 1 lakh, will open on Wednesday and deliveries will commence by the end of February from select KTM outlets in Bengaluru and Pune.

Bajaj had unveiled the scooter on October 16 in Delhi. The Chetak can run up to 95 km on a single charge when ridden in economy mode. A slew of regulations on safety, insurance, and emissions over the past one and a half years have made two wheelers (150cc and above in the mass segment) dearer by almost 30 per cent, hurting demand.

Bajaj’s remarks come against the backdrop of one of the most prolonged slowdowns plaguing India’s automobile market, amid a slowing economy and dipping consumer confidence. Passenger vehicle sales have been on a decline for the past six quarters, while two-wheeler sales have been skidding for four quarters. Sales of motorcycles and scooters fell 15 per cent in the December quarter.

“What purpose is served by making insurance mandatory for everyone? As if people can’t think for themselves. The government has to think on our behalf. We can’t make simple choices,” said Bajaj, alluding to the insurance regulator’s diktat in September 2018, which mandated an upfront payment of premium for five years for third-party liability.

Bajaj also questioned the need to make ABS (anti-lock braking system), a safety feature, mandatory for two-wheelers.

According to him, given the state of India’s roads and traffic congestion where one struggles to go beyond 20 kmph, imposing the ABS (on bikes that are 150cc and above), which increased prices by Rs 8000-10,000, made little sense.

Bajaj Auto takes huge lead over Eicher, Hero Motors in market cap

Hero's m-cap has fallen 25% and Eicher's by 5.2% in the same period. As a result, the m-cap of Hero is nearly half that of Bajaj.

Market News : Domestic demand for mobikes may be under severe pressure, but Bajaj Auto has left its closest competitors, Hero Motors and Eicher Motors, far behind as far as market cap are concerned. While the market capitalisation of Bajaj has gone up by close to 20 per cent this calendar year, Hero and Eicher have foundered.

Hero’s m-cap has fallen 25 per cent and Eicher’s by 5.2 per cent in the same period. As a result, the m-cap of Hero is nearly half of that of Bajaj. The latter’s market valuation is also 57 per cent more than Eicher’s.

The gap has been widening every month. While Eicher’s m-cap ranged between Rs 42,000 crore and Rs 63,000 crore, and that of Hero between Rs 45,000 crore and Rs 63,000 crore, Bajaj Auto’s m-cap varied between Rs 71,000 crore and Rs 94,000 crore

This is a huge departure from 2016, when Eicher held top slot.Bajaj Auto Executive Director Rakesh Sharma said the key reason for the change in market perception had been the company’s focus on exports, which now account for 45 per cent of the firm’s sales. The company is present in more than 70 countries. This, Sharma said, helped Bajaj to derisk the business at a time when demand in the domestic market is under pressure.

Sharma said the market had seen value in the company’s focus on research and development and its ability to bring in technological innovation. The company has expertise in managing a wide portfolio from 100cc to 500cc, to KTM bikes and three-wheelers.

Exports as a percentage of revenues are small for rivals. For example, according to brokerage CLSA, exports of Hero will be under 3 per cent of sales in FY20. While Eicher’s export volumes, according to JP Morgan, will double in FY20 to 22,956, they are still very small compared to Bajaj, which has sold 462,890 bikes in just the second quarter of the financial year, growing at 6.7 per cent. Domestic sales have fallen 25 per cent in the same quarter, according to HDFC Securities.

The brokerage also said that Bajaj was poised for BSVI due to its tie-up with KTM and its diversified portfolio. HDFC Securities said exports would provide Bajaj a cushion against the volatility of the two-wheeler market. Thirdly, the firm is now launching premium brands like the Husqvarna and Triumph.

In the previous quarter, the company’s sales volumes had declined, but realisation increased owing to price hikes and lower material costs, together with lower corporation tax rates. Edelweiss also said Bajaj was better equipped to tackle BS-VI because a large portion of its revenues came from exports, which remained unaffected by the price rise on account of new emission norms.

Why the festival season may not bring much cheer despite tax cuts by govt

Car sales in August fell the most on record and Maruti Suzuki India Ltd.

Poor demand from Indian consumers could dampen the mood during festivals next month, especially for automobile makers and retailers that count on the season for a sales boost, analysts predict.

Indians typically buy everything from new cars to shoes for themselves and as gifts during celebrations steeped in religion and tradition. Yet the slowest economic growth in six years, unemployment at a 45-year high and tepid private consumption may see sales fall short of recent years, even after the government’s $20 billion tax break to companies earlier this month.

“You can make the product 50% cheaper, but there has to be income to spend,” said Nitin Gupta, an analyst at SBICAP Securities Ltd. in Mumbai.

“In the short-term, I don’t see any kind of an income boost. Rather than giving cash to individuals, they have given it to companies.”

Car sales in August fell the most on record and Maruti Suzuki India Ltd. Friday reduced the price on its Baleno RS model by 100,000 rupees ($1,420) to pass on the benefit from the tax cut.

Market researcher Nielsen has lowered its 2019 growth estimate for fast-moving goods to 9%-10% from 11%-12%, while a stock gauge of consumer discretionary firms is set for its first annual back-to-back losses since at least 2005.

Even so, the industry’s fortunes beyond the approaching festival season are poised to improve, according to BNP Paribas SA. Plentiful rainfall seen this monsoon season and cash handouts to farmers will help lift rural incomes, helping sales of staples recover in the second half of the year that began April 1, the brokerage said in a recent report.

Business Standard

Nearly 30 new car, 20 two-wheeler launches lined up till March 2020

Rise of the millennial population, increasing disposable income and availability of innovative mobility solutions will drive the market.

Passenger vehicle (PV) and two-wheeler sales in the country have been bleak in the past few months, despite inquiries being good, due to poor consumer sentiment. To create excitement among consumers, especially during festivals, car manufacturers have lined up around 25-30 launches and two-wheeler makers have lined up another 20 between August 2019 and March 2020. The new launches include electric and hybrid vehicles.

On an average, car makers, excluding luxury ones, invest around Rs 1,500-2,000 crore to launch a new car.

Two-wheeler and PV retail sales dropped by five per cent and 4.6 per cent, respectively, in June 2019, compared to last year.

CARE Ratings says that demand might remain muted till the second quarter before it starts picking up from the third quarter due to festival and pre-buying before BS-VI implementation from April 1, 2020. Also, with higher MSPs announced, farm income is expected to be marginally higher and encourage rural spending.

To cash in on this, car makers have lined up nearly 25-30 new launches. Some of them include Maruti Suzuki Ertiga Cross and S-Presso, Hyundai New Grand i10, Tucson Facelift and Hyundai New Elite i20. Honda would be launching Honda HR-V and New City, while Tata would introduce the Buzzard and Altroz. Skoda expects to launch Karoq, and Renault to launch Renault Triber and Kwid Facelift.

Vikas Jain, national sales head, Hyundai Motor India Ltd, said that sometimes, a slowdown in the market is a cyclical phenomenon. Due to practical challenges such as volatility in fuel prices, high interest rates and increase in insurance premium, some of the buyers are deferring their purchase decision.

The long-term outlook is good considering that the penetration of PVs in India is still very low at around 20 out of 1,000 people. The rise of the young millennial population, increasing disposable income and availability of innovative mobility solutions will drive the market.

Business Standard

Ford likely to form JV with Mahindra, end independent ops in India: Report

The deal would make Ford the latest automaker to pare back its interests in India.

Ford Motor Co is nearing a deal with Mahindra & Mahindra to form a new joint-venture company in India, a move that will likely see the US automaker cease independent operations in the country, two sources with direct knowledge of the talks told Reuters.

The deal would make Ford the latest automaker to pare back its interests in India. At the end of 2017, General Motors Co downsized its Indian operations and stopped selling cars locally, dealing a blow to Prime Minister Narendra Modi's strategy to encourage domestic manufacturing.

Over two decades, Dearborn, Michigan-based Ford invested more than $2 billion in India but has consistently struggled - it currently has a market share of just 3 per cent in India, one of the world's fastest-growing car markets.

Under the terms of the deal being negotiated, Ford Motor will form a new unit in India in which it will hold a 49 per cent stake, while Mahindra will own 51 per cent, the two sources said.

The US carmaker's Indian unit will transfer most of its current automotive business to the new entity, including its assets and employees, according to one of the sources.

"It's like a partial exit (for Ford from India)," the source said.

The deal is expected to close within 90 days, the sources said, adding the value of the transaction was not yet clear.

They spoke on condition of anonymity because of the sensitivity of the matter.

Ford said it does not comment on speculation, but added both companies continue to work together "to develop avenues of strategic cooperation that help us achieve commercial, manufacturing and business efficiencies".

Mahindra too said it does not comment on speculation. It said in a statement it was "working together in identified areas" with Ford after a 2017 partnership arrangement, and "will announce further definitive agreements as we progress on some of the other areas."

Currently, Ford manufactures and sells its cars in India through its wholly-owned subsidiary. In 2017, it formed a strategic alliance with Mahindra under which, among other things, they will build new cars together, including sport-utility vehicles and electric variants.

Business Standard

Hyundai Mobis' latest plan brings to mind one image: A damp squib, again

Even if Mobis's latest resolutions get passed in March, investors shouldn't get too excited.

The South Korean chaebol’s auto-parts unit released an outline Tuesday evening to “maximize” shareholder value. It’ll do anything but that.

The company also formally proposed family heir Euisun Chung as CEO of the unit, which has been under fire by Paul Singer’s Elliott Management Corp. So Chung had to put something on the table to appease investors. After all, he did promise increased engagement months ago, after moving closer to succeeding his father. The stock has plummeted almost 20 per cent since April, when the activist investment fund started rattling at its door. It rose as much as 4.2 per cent Wednesday. In response, Elliott on Wednesday urged shareholders to vote on its own set of shareholder resolutions.

Let’s take a look at Mobis’s latest plan, which addresses some of the issues Elliott raised in its initial “Accelerate Hyundai” proposal. To build “firm trust with shareholders,” the company said it will return 2.6 trillion won ($2.33 billion) over the course of three years. Of this, 1.1 trillion won will come in the form of dividends; 1 trillion from a share buyback; and another 500 billion from the cancellation of treasury shares.

The plan boosts the buyback amount from 188 billion won a year. Those shares won’t be canceled but used for various other things (it’s unclear precisely what). The treasury-share cancellation amount, meanwhile, is the same as previously announced. Basically, the unit is returning 1.1 trillion won of cash dividends over three years, which doesn't equate to much more than it hands out right now – 380 billion won annually. All in all, the returns are incremental at best.

That still leaves a stash of cash on the table: The company had net cash of 7.4 trillion won at the end of 2018. Over the next three years, it plans to hold a “contingency cash reserve” of 3.5 trillion won and spend 4 trillion won on futuristic growth plans including 200 billion to 400 billion won of equity investments in new tech startups (read: 5G, sensors, biometrics, hydrogen fuel cell, etc.) and 3 trillion to 4 trillion won of M&A.

The capex plans are aggressive, too, especially in the auto industry’s current cost environment, as we’ve written. Mobis spent around 2.5 trillion won over the last three years, meaning the company is now planning to shell out almost 60 per cent more to expand operations.

Then there’s the board structure. The company said it plans to appoint two new independent directors. Granted, both nominees bring international experience to the table: Karl-Thomas Neumann in autos and car parts, and Brian D. Jones in finance. But the remaining seven are all Korean with limited diversity in experience, and four are already company executives. The board’s ratio of independent directors, and its size, is below global peers’.

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