While vehicle original equipment manufacturers (OEMs) had hoped for a better demand and supply environment in 2022, events in the previous five months have forced them to modify their expectations.
Geopolitical tensions and the revival of Covid-19 have prolonged semiconductor shortages and caused gasoline price volatility, harming demand in the fourth quarter of the previous fiscal. Due to persistent input cost pressures, OEMs have implemented price increases in recent months.
Indications from Data
While domestic sales volume climbed 15.7 percent year over year, it decreased 5% month over month due to frequent price rises and chip shortages, according to data. Exports also declined 5.7 percent on an annual basis, owing to higher energy prices and a supply shortage as China deals with a rise of Covid cases.
The data also indicates that Bharat Forge, a Pune-based auto component producer, warned earlier this week in its Q4 financial statement that supply chain concerns are still prevalent and not limited to semiconductors. Furthermore, local lockdowns/ geopolitical situations in specific geographies hurt globally obtained materials, resulting in excessive inflation.
Consumer morale is expected to be affected as a result of OEM price hikes and fuel inflation, according to rating agency CareEdge. It said: “The RBI’s decision to increase the repo rate by 40 bps will lead to more expensive auto loans and thus hurt demand further. In addition, concerns regarding global supply chain constraints due to the lockdown in China and the Russia-Ukraine war also persist.”
OEMs and RBI
The Federation of Automobile Dealers Association stated earlier this month that the RBI’s decision to raise the repo rate by 40 basis points surprised everyone. This action will put the brakes on everything and damper the mood even more.
Increased government infrastructure spending, a regular southwest monsoon, new product introductions by OEMs, and pent-up demand will all help the sector develop in the current fiscal year.
According to research, the volume of commercial vehicles (CVs) and passenger cars (PVs) could climb 18 percent and 12 percent, respectively, this fiscal year, after rising 26 percent and 13 percent the previous year.
On a high base effect, however, two-wheelers and tractors are projected to underperform once again. The tractor segment’s revival and significant development are dependent on the monsoon forecast coming true.
As per Pushan Sharma, Director of CRISIL Research, CV demand growth, particularly for medium and heavy commercial vehicles (MHCVs), is likely to be supported by replacement demand due to better fleet utilization and profitability, as well as government infrastructure investment.
While semiconductor concerns exist at the moment, analysts expect them to improve by the second part of FY23. Semiconductors supply restrictions and container availability concerns are projected to impair sales and production in the near term, according to Securities, which they believe will be rectified in H2FY23.
Analysts anticipate substantial double-digit volume growth in the three-wheeler and M&HCV industries in the current fiscal year. The long-term foundations of the vehicle sector, according to Reliance Securities, are still intact.