Slowdown? Automobile industry to up capacity 30%

If winter comes, can spring be far behind?
— PB Shelley

Car makers in the country are so optimistic about the local market that they are preparing for a situation in the coming years where demand will far outstrip supply. Unless, of course, they increase capacity further.

Capacity utilisation of car makers is expected to decline 6% in the next two years as demand moderates. But that hasn’t deterred companies from planning to add even more capacity in the near future.

According to Jatin Chawla and Akshay Saxena of Credit Suisse Equity Research, the Indian passenger car industry may see capacity expansion of up to 30% in the next two years.

At this rate, car making capacity would have doubled in four years.
This, despite car sales growing a mere 7% between April and June, against 30% in 2010-11.

Brushing aside concerns of a demand slowdown, players like Maruti continue to relentlessly pursue capacity addition plans since they don’t want to be caught in the predicament they faced in 2009 and 2010. Maruti had then been forced to increase production at its existing facilities in Gurgaon and Manesar by adding shifts to meet the sudden surge in demand, since it had not planned for additional capacity in advance.

The situation was no different for other players, both car and parts makers.
Maruti is expected to finalise by October the location for its new production facility, which could entail investment of about `6,000 crore. “The optimum size will be to have installed capacity of 7.5 lakh to 10 lakh units per year... The facility is likely to be operational by 2017,” said chairman RC Bhargava.

Toyota, too, is increasing annual capacity by 1 lakh units to 3.1 lakh by 2013.

Ford India, which has ridden the Figo success wave all of last fiscal, is setting up its second facility with an initial annual capacity of 2,40,000 units, besides an engine plant with an initial annual capacity of 2,70,000 engines.

Among others, Maruti reported a decline in sales of 4% in June, its first in a decade. Many others also fared badly.
Interestingly, the moderation in demand seems to be happening only in select models. For instance, Maruti, which has reduced production of its largest selling model Alto (and some other models) by 5% this month, is still struggling to fulfill demand for cars such as Swift and Dzire, which continue to be waitlisted. Toyota Kirlosakar Motors has only this month been able to extinguish the long waiting periods on Etios sedan. However, its new hatchback, Liva, still carries a 3-4 week wait. Ditto for the new Hyundai Verna, whose diesel version has a 5-6 month waiting period. Even Tata Motors has reduced production of some models this month for low demand.

Yet, once the new capacities come on board, there is also a possibility of under-utilisation, depending on the prevailing demand scenario.

“Maruti till last year was at 100% utilisation. With the slowdown in sales, their capacity during first four months is somewhere around 90% currently. With additional plant that the company is considering, the level is further expected to go down. However, it is not a cause of concern as demand for company’s vehicles remain robust,” said an analyst from PINC Research.     

Surjit Arora, analyst from Prabhudas Liladher said, “Slowdown in demand is just a temporary phase with interest rates, fuel prices increasing. The demand is expected to pick up next year and will give a boost to the industry. Even if the overall utilisation level is lower currently, the demand for cars in coming years will be positive.”

“Companies like Nissan, Maruti Suzuki, Ford are building capacity for exports purpose. Hence utilisation will not be a big concern for the companies,” said Abdul Majeed, India leader for automotive practice, PricewaterhouseCoopers.