Slowdown in auto sales: 5 reasons why cars are not selling (as much)

The first reason is purely cyclical — given that car sales have been clocking near double-digit growth for the better part of the last 36 months, a tempering of demand was always around the corner.

Some of the demand-supply gap in the car industry in the months immediately after the post-pandemic reopening was on account of a crippling shortage of chips that followed the Covid-19 disruption, which had forced manufacturers to cut back on production at the time, and led to high pent-up demand.

This chip shortage has now eased completely and car deliveries are fully back on track. At the same time, the pent-up demand has eased, which has resulted in a progressive oversupply situation. There were indications as early as in the post-festival season last year — but the tempering of footfall and enquiries was then brushed aside as a temporary phenomenon by both carmaker and dealers.

Automakers in India generally report wholesale dispatches to dealers, and not actual retail customer sales. Even as the demand turned sluggish, dispatches from auto companies to dealerships continued at more or less at the same blistering pace of the months leading up to the slowdown, which led eventually to a pile-up at dealerships.

Now, as dealers grapple with the problem, it is only a matter of time that this inventory pile-up moves further upstream to the stockyards of car companies.

The second reason is that there have been a slew of launches over the last 12 months, both of new car models and of feature-rich upgrades of existing models. This has led to subdued demand for the older models and the earlier versions of the upgraded models, contributing to the inventory pile-up at dealerships.

Also, contrary to the impression that the auto sector has been largely immune to the consumption demand problem, the affordability challenge has manifested itself clearly in the entry-level auto segment, where the smaller hatchbacks have struggled to see demand traction.

This, according to an executive with a leading carmaker, is because the upward conversion of consumers from two-wheelers to entry-level cars is simply not happening at the rate that it once did, clearly reflective of the consumption problem that is showing up at the lower end of the auto segment.

As a result, most carmakers, with the exception of Maruti Suzuki, the country’s largest carmaker, have either cut back on entry-level hatchback offerings or simply exited this product category altogether.

Certain vehicle segments or models are seeing markedly lower traction. This includes Battery Electric Vehicles (BEVs).

According to a senior executive with Tata Motors, the country’s largest electric vehicle maker, the problem is that while the first adopters of EVs continue to be bullish, the conversion of new customers who want to shift from internal combustion engine (ICE) vehicles to BEVs is perceptibly tapering off. This trend is visible across markets — and India too, is showing early signs of EV fatigue.

Even some ICE car models, such as the Maruti Suzuki Jimny, have failed to attract the sales that were expected, forcing the manufacturer to offer sharp discounts to clear stock.

On the other hand, some newer segments such as hybrids are seeing improved traction, which is reflective of the global trend. But even in this segment, while Toyota is doing well with sales of its Hyryder and Innova Hycross hybrid models, Honda has largely struggled to sell its City e:HEV hybrid.

A fourth reason, and an increasingly important one, is climate change. An executive in the sales team of Maruti Suzuki indicated earlier this year that soaring temperatures in most of the country during the extended summer, and the national elections that ended in June, kept buyers from visiting showrooms.

Thereafter, heavy rain in parts of the country’s south and east impacted demand further — demand is reported to have been hit due to heavy rain and flooding in Kerala and Telangana, for example. An executive with Hyundai Motor, the country’s second largest carmaker, said that repeated instances of unusually heavy rain in Kerala, a big diesel car market, has badly dented the sale of diesel models for most carmakers.

The fifth reason is that when carmakers and dealerships offer high discounts and price cuts to clear stock for an extended period of time, consumers tend to postpone their buying decisions and instead wait in anticipation of prices falling further, or deeper discounts in the future.

That too tends to have a spiralling impact on consumer demand.

As a result of some or all of these factors, dealerships are now reporting surging inventory levels that are hitting new highs with every passing month. According to data collected by the Federation of Automobile Dealers Associations (FADA), inventory levels at car dealerships, which touched an all-time high of 67 days in June, surged to 72 days in July, and to 75 days in August.

Last month, inventories worth an estimated Rs 77,000 crore or higher were sitting idle at auto dealerships, with a number of these dealers reporting problems in moving vehicles from their yards to customers’ hands, according to FADA.

For auto dealers, inventory pile-ups have a carrying cost, given that limited stock yards at the dealerships are filled up with cars that are not selling. At the same time, they do not have space to accommodate the newer and faster-moving models dispatched by carmakers. It is only a matter of time that the stockyard inventory problem gets transferred to carmakers from the dealerships.

To clear stocks, carmakers are offering steep discounts on models that were facing long waiting times only some months ago. High-demand SUVs such as Mahindra’s XUV700 and ScorpioN, Tata’s Harrier and Safari, Maruti Suzuki's Grand Vitara and even best-selling MPVs such as the Suzuki Ertiga are now readily available at most locations, depending on dealer inventory, and often with heavy discounts.