FY2024 outlook for the automotive industry

By Atul Jairaj and Malvika Mathur

The Indian auto industry has faced multiple challenges over the past few years, especially with the onset of Covid-19. In FY2023, the first year of recovery since Covid-19, the industry continued to face headwinds, including the ongoing Russia-Ukraine war, steep increases in crude oil prices, and prolonged global semiconductor shortages. Despite these challenges, the industry has shown growth and signs of recovery.

Passenger vehicles

The passenger vehicle segment saw the year end with approximately 36 lakh retail sales, marking a 23 percent growth over FY2022, with the SUV segment contributing the most. This could be attributed to a healthy replacement demand, relatively stable semiconductor supplies, and pre-buying prior to the second phase of BS-VI emission norms implementation on April 1, 2023. In FY2024, owing to strong demand and easing chip shortages, most growth in passenger vehicles will be fueled by the SUV segment. A few initiatives announced in the budget will also positively affect the passenger vehicle sector’s growth in FY2024.

In FY2024 the Rs 3,000 crore allocation for the Indian Semiconductor Mission will also help reduce import reliance. Given the increased proliferation of tech-enabled features in passenger vehicles, the semiconductor mission is likely to impact this segment the most. Revision of the income tax slabs is also likely to increase disposable income in the hands of the middle class, driving demand for entry-level cars and two-wheelers. 

Electric vehicles

With the Indian government pushing for electric mobility and imposing stricter emission norms, we can expect to see more EVs on Indian roads in 2023. Budget 2023 announced the extension of the customs duty exemption for capital goods and machinery imports for manufacturing lithium-ion cells used in EVs.  Other noteworthy factors contributing to the EV momentum include the global impetus on supply chain diversification, strengthening of the Tier 2 and 3 domestic supplier base, and ‘Make in India’ initiatives, such as Production Linked Incentive (PLI) and Faster Adoption and Manufacturing of Hybrid and Electric vehicles (FAME) schemes.

According to the Society of Manufacturers of Electric Vehicles (SMEV), the overall EV segment registered a growth of around 158 percent from last year of which 62 percent came from two-wheelers. This can be attributed due to their economic viability when compared with their internal combustion engine (ICE) counterparts and the increase in numerous homegrown brands. EV sales constituted only 5 percent of the total vehicle sales in FY2023, and the path seems favorable for achieving 20-30 percent adoption by FY2030. That said, the path ahead in addressing range anxiety, lack of sufficient charging infrastructure, financing constraints due to the high cost of batteries, safety concerns with battery technology, uncertainty regarding the resale value continues to be long.

Two-wheelers

Unlike passenger vehicles, the two-wheeler segment is yet to reach its previous peak of FY2019. The entry-level commuter segment continues to see headwinds, driven by an increase in on-road prices across the entry-level models over the past few years.

Three-wheelers

Three-wheeler sales saw an 84 percent jump in FY2023, with electric passenger rickshaws growing by 119 percent. According to the Federation of Automobile Dealers Association of India (FADA), the availability of financing options, alternative fuels, and subsidies contributed to the growth of this segment, increasing electric three-wheelers’ share in the three-wheeler segment to 49% from 42% a year ago. The three-wheeler passenger and goods category also saw a growth of 78% and 24% respectively.

Commercial vehicles

In FY2023 commercial vehicles saw a buoyant growth of 33 percent. This was on the back of massive government and private spending and a push for mining and infrastructure development, leading to increased demand, especially for heavy commercial vehicles. The explosion of e-commerce companies led to a rise in sales of light commercial vehicles. 

Going forward in FY2024 growth is estimated to be in single-digit numbers due to the high-base effect, fulfillment of pent-up demand in FY2023, continued semiconductor shortages, inflationary pressures, routine price hikes, and regulatory changes. Additionally, the expected arrival of El Nino in 2023 could impact rural India’s growth potential.

Megatrends in FY2024 and beyond

Customer experience (CX) beyond in-store – Customers of today want seamless and hassle-free journeys leading to an increasing number and adoption of digital platforms. Many vehicle buyers want the ability to complete all or some of their car purchase journey online. Consumers prefer to access features/applications that will help them make payments, schedule/track service appointments, and learn about their vehicle’s features. They also expect and seek trust and transparency from OEMs, especially on supply shortages. Hence there has been a shift in the distribution model of OEMs from only brick and mortar to a hybrid model of D2C and dealers where customers use online channels to research models, connect with dealers for clarification, and touch, feel, and drive the vehicle before finalising and completing their purchase journey online.

Connected vehicles and ADAS becoming more mainstream– With the rise of 5G and improved connectivity, many connected vehicles use cases are gaining prominence and will continue to do so. Advanced Driver Assist Systems (ADAS) is no longer offered only in luxury vehicles but has now become hygiene. In 2023, the sector is slated to witness 6-7 launches under Rs 20 lakh, offering ADAS. Consumers are ready to share their personal information if it helps them get suggestions for safer driving routes, maintenance updates, and road safety alerts to prevent collisions.

EV ecosystem going beyond new vehicle sales – EVs have brought in a plethora of fresh questions that are yet to be answered optimally – what happens to resale value? What is the right way to dispose of an EV battery?  While on one hand, localisation efforts in EVs across the value chain will continue, we will also see the emergence of new business models, especially around EVs, for instance, changes in the way OEMs generate aftersales revenue – With EVs coming in, revenue maybe impacted owing to fewer vehicles requiring workshop assistance for service. Alternatively, this revenue may also increase with over-the-air updates and subscription services required for this segment.

Supply challenges and the need for agility –With supply shortages, OEMs are witnessing long wait times, especially for certain models. We are also observing cases where customers are increasingly canceling bookings due to long wait times. While some of these factors are not directly in the control of OEMs or suppliers, the use of intelligent data to ensure smarter supply chains will help forecast challenges ahead of time. Another interesting trend would be if supply shortages lead the way for consumers to expect longer wait times for delivery of a new vehicle, opening the door to a more “build-to-order” retail paradigm. 

Increased acceptance of used vehicles – The used car market has accelerated since the pandemic due to the importance of personal mobility. The used-to-new car ratio is currently at 1.4:1 and is likely to touch 2:1 in the next five years. The spike in this sector has been due to factors like the availability of certified cars with the influx of organised players, a decrease in the average tenure of ownership for cars due to higher disposable incomes, and supply shortages of new cars. We are likely to continue to see growth in this segment in 2023.

In conclusion, this will be a wait-and-watch game in FY2024, where the industry will consolidate and stabilise. Despite headwinds, the industry is poised for reasonable growth. Push for supply localisation, increased EV adoption with continued support from the government, affordable connected features, the rise of digitisation to enhance customer experience, and a hybrid dealer+OEM distribution model will be some trends to watch out for in the coming year.

The author’s Atul Jairaj is Partner, Consulting at Deloitte India, while Malvika Mathur is the Associate Director, Consulting, Deloitte India.

Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.



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